GST shift to hit capital cycle of biz

The transition to GST will disrupt the working capital cycle of businesses in the initial phase and thus easy

liquidity in the system is essential for two to four months, says India Ratings and Research (Ind-Ra). The

agency believes that in order to minimise the magnitude of such disruption at the earliest, and to absorb the

sudden changes in requirement of short term finance, easy system liquidity is necessary. Ind-Ra studied a

sample set of 11,000 corporates and estimates that the input credit lock up for this sample could be around INR

1 trillion of which about INR500 billion could be blocked for about two months which may result in higher short

term working capital requirement for businesses in the near term.

Ind-Ra’s sample set of corporates showed that the task is humongous and can be gauged by the size of closing

inventory of around INR11.2 trillion as at FY16, which are at various stages of production process and includes

other inventory procured at various dates from different sources including CST, VAT and exempt purchases. The

average excise duty of the sample set works out to around 5.5 per cent. Further assuming that 25 per cent of the over-all

inventory is procured locally and is subject to an average VAT rate of 14 per cent, the over-all input credit lock up

will be around INR1 trillion for this sample and would be higher on an over-all basis. Even if 50 per cent of this is

not available for set-off during the transition phase, it would result in blockage of INR500 billion of input

credit for about two months (although may not necessarily be used during the first two months). Moreover,

service tax rates are likely to increase by a flat 3 per cent to 18 per cent as against 15 per cent. These factors may put stress on

the short term working capital requirement for businesses.

Ind-Ra believes that even if businesses are able to achieve this seemingly mammoth task and the amounts are

credited to the electronic ledger on a provisional basis, it will be subject to variations in the near term as

there could be litigations on eligibility and availability under the existing laws and under the GST regime

which may lead to disruption of working capital for businesses. The impact on individual companies could

however vary widely and Ind-Ra’s study suggests that around 85 per cent of the blocked input credit will be with

companies with greater than INR5 billion revenues. Ind-Ra believes larger companies whose credit profiles are

relatively stronger will tide over the short term working capital disruption relatively easily as compared to

the ones which have weaker credit profiles.