Working capital problems of MSMEs will get accentuated as banks, currently reeling under bad loans, are reluctant to give credit
With businesses required to remit taxes collected under the Goods and Services Tax (GST) regime every month, their working capital demand from the banking system is likely to go up.
In the pre-GST era, taxes were remitted at quarterly intervals. Now, the working capital cycle of businesses will change from a quarterly to a monthly cycle, say experts.
Liquidity of businesses could tighten as on the one hand they have to remit taxes collected on goods and services sold in the previous month, while on the other hand, trade credit, will continue to be 90 days or more in many cases.
Liquidity under pressure
Liquidity could also come under pressure as there may be delays in an enterprise getting the benefit of Input Tax Credit if, say, its supplier does not remit taxes on the sale of inputs in time. Input Tax Credit is a mechanism under GST to avoid the cascading impact of taxes. Under this, the credit of tax paid at every stage will be available as a set-off for payment of tax at every subsequent stage.
Considering that the working capital cycle will change from quarterly to monthly, YES Bank is making a ‘GST Ready Working Capital Management’ solution available to customers, said Sumit Gupta, Group President & National Head — Business & Rural Banking.
S Ravi, a Chartered Accountant, opined that under GST, working capital demand will go up mainly due to monthly (returns) compliance and payment of tax, which will marginally impact cash flows of businesses.
Added a senior public sector banker: “Earlier if the goods supplied were rejected by a customer and the goods as well as the invoices were returned, then no tax was payable on such transactions. Now, under GST, once the goods are supplied, irrespective of whether they are returned or not, you need to pay a tax even as the buyer may get the benefit of trade credit. However, in case the goods are returned later, you can also claim a refund.”
Funds getting blocked
The banker observed that under the GST regime, in a running business, the combined effect of monthly tax payments, receivables on account of a longer trade credit cycle, and possible delays in getting Input Tax Credit could see funds getting blocked.
Bhanwar Lal Chandak, independent economist, observed that working capital problems of micro, small and medium enterprises will get accentuated as banks, which are currently reeling under bad loans, are reluctant to give credit, while trade credit is already in the doldrums.
[“Source-thehindubusinessline”]
