IndRa's study showed that the task is humongous as the size of closing inventory is around Rs 11.2 lakh crore as of fiscal 2016
The goods and services tax (GST) may impact the liquidity situation for companies as well as banks as the input credit system – paying the tax and getting a credit later – may result in money being locked up at various stages.
In cases where the money is going to the government coffers, tax officials say that reimbursements will happen in seven days' time, but certainly there are issues.
A senior tax official involved with the implementation of GST in Mumbai said, "We don't expect to see much of tightness in liquidity because when the seller offloads his goods, he will get the tax credit from money that the customer pays for the goods. In inverted tax payments where the money goes to the government, we are working on releasing the payments in seven days."
India Ratings in a report said that 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. The rating agency concluded this after studying a sample set of 11,000 corporates. It estimates that the input credit lock-up for this sample could be around Rs 1 lakh crore, of which about Rs 50,000 crore could be blocked for about two months, which may result in a higher short-term working capital requirement for businesses in the near term.
A senior banker said, "Banks are feeling a cash crunch even now with not enough currency for all the needs. The GST is expected to tighten things further. Banks have made a representation to the GST Council. They have told us that the government will be quick to release funds for the taxes paid to the government."
IndRa's study showed that the task is humongous as the size of closing inventory is around Rs 11.2 lakh crore as of fiscal 2016. These are at various stages of production and include other inventory procured at various dates from different sources including central sales tax (CST), value added tax (VAT) and exempt purchases.
The average excise duty of the sample set works out to around 5.5%. Further assuming that 25% of the overall inventory is procured locally and is subject to an average VAT rate of 14%, the overall input credit lock up will be around Rs 1 lakh crore for this sample and would be higher on an overall basis. Even if 50% of this is not available for set-off during the transition phase, it would result in blockage of Rs 50,000 crore of input credit for about two months (although may not necessarily be used during the first two months).
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