India Ratings and Research (Ind-Ra) in its latest report has said that the transition to the new nationwide goods and services tax (GST) regime would significantly affect the micro, small and medium enterprise (MSME) space more than other industries, as industry participants lack compliance infrastructure to map the entire outstanding inventory with tax invoices. It also noted that MSMEs’ weak credit profile and risk weights attached to the loans extended to this sector in banks’ books could force the sector to resort to borrowings from non-bank finance companies. Furthermore, it has warned that this is more costly than borrowing from banks and could aggravate the credit impact of the GST transition on the MSME space.
However, the rating agency said that large corporates and firms with streamlined infrastructure may find it easy to map the entire outstanding inventory with tax invoices. It also noted that the new tax regime would also result in higher working capital requirements for most participants in manufacturing sector like steel, textile, auto and auto ancillary, owing to their requirement to pay the entire tax at the point of the dispatch of goods from factory gates, and also for the movement to warehouses. It estimated that working capital requirement to rise by 200 - 450 basis points of revenue for steel sector, 500 basis points of net value addition across the value chain for the textile industry. It also indicated that the increase in working capital requirement, as a proportion of revenue, would aid bank credit growth for large corporates.
Ind-Ra believes that industry participants’ ability to tide over working capital mismatches during the implementation phase and beyond would be relative to their balance sheet strengths and capital market access. It also observed that the ability of banks to fund these mismatches depends on the risk weights attached to such lending. The report noted that while it would be beneficial for the banking system, given the low incremental credit deposit ratio, banks may refrain from providing additional financial supports to entities with a weak credit profile.