India Inc. Under Liquidity Crunch by GST ITC Impact

 

Goods and services tax will be developing some tough situations for the business units to survive with the hectic compliance issues. As it is speculated that small and weak credit profile companies will be having more difficult issues. Now it seems that ahead of GST, there will be an acute problem of working capital for the companies. For the reason, the companies will have to find some other sources of an income generating idea for a period of two to four months at stretch. According to India rating research, conducted over 11 thousand companies, it is assumed that there will be blockage of 50 thousand crores for two months due to input tax credit. It is also noticed that due to the increase in service tax from 15 percent to 18 percent, there will be issues in short term for the working capital.

According to the sources, it would be easy for companies with large and better credit profile to deal with this problem, they will get loans easily, but there will be difficulties for small and weak credit profile companies. According to India Ratings, this is also a matter of concern, because its impact will also be on the monetary policy. India Ratings Research believes that surplus cash should be retained in the system at present.

Read Also: Goods and Services Tax (GST) Impact on Indian Businesses

India Ratings Research, which includes 11,000 companies in its study, pays an average 5.5% excise duty. If the average VAT rate on their product is 14%, then one lakh crores of these companies will be blocked in the input credit. In the transition period, if half of the amount hangs in between, then at least Rs 50,000 crore will be blocked for two months in which 85% of revenue will be leased to companies whose annual turnover is more than Rs. 500 crores.

The cost of companies may increase making some of the issue prevailing persistently. While the companies can require more working capital and If the demand for capital is increased, the effect will be on interest rates ultimately increasing the interest rate will increase the cost of companies. The money can be returned to the companies on a provisional basis, but there is a problem too. The litigation may start with the company which is entitled to the number of returns and refunds.

Talking about the issues in agricultural origin issues, like most food grains are out of GST but 5% tax will be charged on oilseeds. With this, companies making edible oil (edible oil) also have the fear of collapsing. The crushing of oilseeds produces 70% of Khali and only 30% oil is available and as Oil in GST is in the 0% and 5% category, Hence the input tax credit will not be available on the Khali. That is, 5% tax on the full amount of input will be paid, but only on one part of the credit output. On oilseed, only 1.5-2% of the 5% tax will be available on oil. The remaining 3% will have to claim a refund which will block the amount for some time. All these issues are just examples from a long list and must be taken into consideration to avoid any further exaggeration.