Contrary to earlier expectations, the goods and services tax (GST) will lead to higher working capital
costs for companies as payments
are getting blocked at various levels in the value chain and it is becoming difficult for manufacturers to get input tax credit.
The pain is more severe for second- and third-tier vendors as large corporate buyers or original equipment manufacturers hold up payments
due to the uncertainty about the tax liability and the tax set-off for the supplied goods and services.
“My receivables have tripled since the GST
roll-out. Customers have been holding back payments
for over two months now as they cannot reconcile our GST
returns with theirs,” said a transport contractor working for large construction and oil firms.
This is creating uncertainty about the vendor’s tax liability. “Earlier, we used to receive payments
by the end of the third week every month for the bills submitted by the seventh of every month,” the contractor said. He is now being forced to borrow from non-banking channels at higher interest rates to pay for operating expenses.
Plus, there are delays in refund of claims. “The government has been collecting tax from us (companies) but delaying the payment of claims that arise as a result. Naturally, working capital
will get blocked,” said the chief executive officer of a multinational fast-moving consumer goods (FMCG) company.
All this will reverse the trend of improvement in working capital costs that listed manufacturing companies have been able to benefit from in recent years owing to a decline in commodity and energy prices, leading to lower inventories and receivables. Net working capital as the share of net sales declined to 19.6 per cent during the financial year 2016-17 (FY17), compared with 21.7 per cent a year earlier and a high of 27.7 per cent in FY08 (see chart).
The improvement was largely driven by a relative decline in inventory (or stock) of raw material, finished goods, and receivables. The analysis is based on the balance sheet data of listed companies, excluding financials, oil, and information technology (IT) services.
Companies are hit by working capital
woes at a time when their ability to absorb short-run disruption in cash flows is at its weakest in recent years.
The cash and bank balances were equivalent to just 9.1 per cent of the revenues of listed companies (excluding oil, banks & financials, and IT) in FY17, down from 11.1 per cent in FY14 and a high of 16.8 per cent in FY07.
The biggest headache is for exporters. David Schock, chief financial officer (CFO) at Ford India, India’s biggest car exporter, said the quantum of cash needed by businesses to meet revised compensation cess had become significantly higher. “While the new norms block more working capital
for auto exporters, the process of claiming refunds is also not becoming easy. Blocking significant working capital
for an extended duration doesn’t augur well for any company,” he said.
The CFO of a large textile exporter, who did not want to be named, said his company was considering a shutdown on liquidity woes. “Earlier, we used to pay the difference by matching the input and output credit. But, after the GST
implementation, we are paying the entire gross amount upfront, with the government promising to refund the money in future,” he said. A lot of its funds are now blocked, which he expects to continue for the next two to three quarters.
The government has called a meeting of textile exporters next week to sort out the issue but till then the industry is at a standstill.
“The issue we are facing at the moment is that this facility (of refund) is not available on the GSTN (GST
Network) portal yet. The second issue is that the cess (up to 22 per cent) is payable only in cash which would mean blocking more funds, leading to a cash flow issue,” said Andreas Lauermann, president and managing director at Volkswagen India. He added that these inefficiencies needed to be removed to make exports more competitive.
“While the government has announced 90 per cent of the refund within a few days, our past experience shows this time-frame invariably goes beyond three months. We hope for a quicker refund,” said Lauermann.
Other industries, too, are concerned. “The issue of stuck working capital
will creep up not now but a few months down the line if the government does not address the issue of tax claims and their refunds quickly,” said Sumit Malhotra, managing director (MD), Bajaj Corp.
Most firms have filed their returns for July, called the GSTR1 statement, but are yet to reconcile this statement with their suppliers under GSTR2A. The government has given time till October 31 to file the GSTR2A for July. A mismatch between the two will result in claims if companies have ended up paying more tax. A lag in clearing these claims will result in working capital
Analysts say the GST
will worsen the financial impact of a demand slowdown due to a dip in economic activity. “Demand slowdown anyway leads to a rise in working capital
as unsold inventory rises and customers delay payments.
will worsen the situation forcing companies to take a hit on their profitability during the current quarter and next quarter as well,” says G Chokkalingam, founder and MD, Equinomics Research & Advisory.
Another chief executive of a multinational FMCG company has described the tax filing and claim process as worrisome. “The GSTN has not been accepting the tax returns appropriately. There have been technical glitches the network has faced, delaying the process,” he said.
Firms with manufacturing units in multiple places have to file for each location increasing the work-load. “Our suppliers, too, have to deal with extra work that comes with compliance at every location, leading to wastage of more man-hours. All this effectively sets the clock back for us,” he said.
(Krishna Kant, Viveat Pinto, Ajay Modi, Dev Chatterjee and Aditi Divekar contributed to this story)