Many corporates could face stress on their working capital after a Goods and Services Tax (GST) regulation may lead to hundreds of crores stuck in input tax credit claims. A government regulation that disallows companies to take input tax credit if vendor invoices are not uploaded on the GST network is creating problems for the companies. According to the GST law, invoices have to be uploaded on the GST IT network for every transaction for it to be complete and eligible for tax credits.

Companies are claiming that since the rule does not specify the time period of this calculation, it is creating a situation where some companies may end up losing input tax credit if the vendor has not supplied an invoice.

GST crunch on Liquidity shall force retailers to jack up prices which makes procurement cost for exporters and manufacturers high on one hand. It’s a known fact that exporters are refusing orders on account of this and this is not a good sign for the economy.

Meanwhile, the Businessmen shall be forced to resort to borrowing which again comes at a cost. The Federation of Indian Export Organisations (FIEO) also said that micro, small and medium enterprises (MSMEs) are cutting their workforce due to cash crunch. FIEO Director General Ajay Sahai said that exporters are worried about the delays in the refund. Thus it would dent the liquidity situation of traders and increase compliance cost of merchant exporters.The high CENVAT(Central Value Added Tax) intensive manufacturing sector shall have to take the maximum hit

Under these ‘illiquidity’ conditions, many companies try to hoard and save liquidity and increase their precautionary cash balances, which sets off a spiral in falling payment volume. The payment system plays a key role in the transmission of liquidity shock. Once a critical threshold of trade debtors’ defaults/delays is reached, there is a possibility of a sudden illiquidity cascade through the entire system. These are the central features of the present liquidity crisis. There is a clear relationship between late payment/defaults and the rate of insolvency and output loss.

Considering that India’s financial system is going through a challenging phase due to NPAs and bankruptcies, a fresh wave of credit defaults due to GST muddle is the last thing India needs.

The author can be contacted at rnath@rnaca.com