Transition to the Goods and Services Tax (GST) regime will significantly affect companies with weak credit profiles, especially small units, due to lingering short-term liquidity mismatch arising from the delayed input credit refunds, says a report.
"The short-term liquidity crisis arising from delayed input credit refunds is due to the difficulties in mapping the inventory held on the transition date with respective invoices, various GST Network-related technical issues and admissibility of these refund claims.
The micro, small and medium enterprises (MSMEs) are the worst hit as they lack compliance infrastructure to map the entire outstanding inventory with tax invoices, it noted.
The weak credit profile and risk weights attached to the loans extended to MSMEs in banks' books could force these companies to resort to borrowings from non-bank finance companies.
"This is more costly than borrowing from banks and could aggravate the credit impact of GST transition on the MSME space," it warned.
The report, however, said large corporates and firms with streamlined infrastructure may find it easy to map the entire outstanding inventory with tax invoices.
The agency said GST would also result in higher working capital requirements for the majority of the participants in the manufacturing sector 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.
The increase in working capital requirement at 200-450 bps of revenue for the steel industry and at about 500 bps of net value addition across the value chain for the textile industry.
"The increase in working capital requirement, as a proportion of revenue, would aid bank credit growth for large corporates," it said.
Within the construction sector, the GST would have a negative impact on the cost of setting up power plants as capex cost would increase.
For engineering, procurement, and construction contracts, GST rates at 6-11 per cent are higher than the earlier regime, which can increase project cost, if contractors' compliance infrastructure is not robust enough to enable them to use input credit.
"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 report said.
The ability of banks to fund these mismatches depends on the risk weights attached to such lending. Although it would be beneficial for banks, given the low incremental credit deposit ratio, they may refrain from providing additional capital to entities with weak credit profiles, the report said.