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GST to increase working capital needs of manufacturers
Oct '17
Courtesy: India Ratings & Research
Courtesy: India Ratings & Research
The Goods and Services Tax (GST) would result in higher working capital requirements for most of the companies in the manufacturing sector, including textile production, according to India Ratings and Research (Ind-Ra). The increase in capital requirement is estimated at about 500bp of net value addition across the value chain for the textile industry.

The higher capital working requirement will be needed owing to the requirement to pay the entire tax at the point of the dispatch of goods from factory gates, and also for the movement to warehouses, Ind-Ra said in a press release.

Also, GST has been imposed on some goods including the cotton value chain for the first time. Furthermore, the reduction in the cost of production for most manufacturers due to the uninterrupted flow of input tax credit (ITC) would lead to some savings in working capital, which would partially offset the impact of higher working capital.

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. The ability of banks to fund these mismatches depends on the risk weights attached to such lending. Although 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.

As such, the transition to the GST regime would significantly affect companies with weak credit profiles because of a short-term liquidity mismatch due to delays in the availability of ITC. This is due to the difficulties in mapping the inventory held on the transition date with respective invoices, various GST network (GSTNIT back bone of GST)-related technical issues and admissibility of these ITC claims. The admissibility could depend on companies’ ability to match corresponding tax invoices with vendors’ filings.

The transition to the GST regime would 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, according to Ind-Ra. (RKS)

Fibre2Fashion News Desk – India

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