Working capital cycle may wobble on GST
Rollout of goods and services tax, or GST, may affect the working capital cycle of business in the initial phase, with input credit worth Rs1 trillion locked up
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The rollout of the goods and services tax (GST) may affect the working capital cycle of business in the initial phase, with input credit worth Rs1 trillion locked up, India Ratings and Research (Ind-Ra) said.
Input tax credit refers to the amount of tax already paid on materials purchased, which can be used to set off tax payable on selling the finished product. Easy liquidity is essential in this period to take care of cash requirements of companies.
Ind-Ra’s analysis shows that the closing inventory as of fiscal year 2016 was around Rs11.2 trillion. Since the service tax is also to increase from 15% to 18% on some services, this may add to the strain on short-term working capital needs. It also points to the risk from litigation that may arise as tax authorities may dispute claims of input tax credit on goods purchased before the GST cut-off date.
About 85% of the blocked credit could be with companies having more than Rs500 crore of revenue. Larger companies may be in a better position to deal with the problems during transition, compared to the smaller ones, according to Ind-Ra.
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