As the implementation of Goods & Service Tax (GST) is nearing, there are concerns that it could put pressure on the working capital of industries. According to credit rating agency- India Ratings and Research (Ind-Ra), GST implementation will affect the working capital cycle of business in the initial phase owing to the lock up of input credit and noted that easy liquidity in the system is essential to minimise the magnitude of such disruption at the earliest and to absorb the sudden changes in requirement of short term finance.
The agency’s study on a sample set of 11,000 corporates has found that the input credit lock up for this sample could be Rs 1 trillion of which about Rs 500 billion could be blocked for about two months and this may result in higher short term working capital requirement for businesses in the near term. Ind-Ra has further said that the task is humongous and can be gauged from the size of closing inventory of around Rs 11.2 trillion as at fiscal year 2016, which are at various stages of production process. Besides, service tax rates which are likely to increase by 3 percent to 18 per cent from 15 per cent may put further pressure on short-term working capital needs.
The credit agency further said that though the GST impact on individual companies could vary widely, around 85 per cent of the blocked input credit will be with companies having more than Rs 5 billion of revenue and added that larger companies may be in a better position to deal with the problems during transition compared to the smaller ones. Besides, it has noted that since the overall credit offtakes is low and banking system liquidity is at its high level, banks will also be in a position to tackle any unanticipated volatility in fund requirements.
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