Goods and services tax shock on small and medium enterprises working capital in India

Sumathi Kumaraswamy

doi:10.9770/jesi.2020.7.4(59)

Abstract

Goods and Services Tax (GST) reform introduced by the Indian government in 2017 was considered as the utmost radical and comprehensive indirect tax regime undertaken since independence. The new tax reform had creataed a shock wave among the Indian business houses, especially to the Small and Medium Enterprises short term working capital requirements. This research paper analyzes the working capital constraints created by the implementation of GST on the SMEs. Three research models have been developed by including the major working capital components namely average collection period, average payables period, inventory conversion period and a dummy variable to capture the effect of GST. The mathematical model presented in the paper has been tested using Random effects GLS method. The results of the study reveals that during the sample period the SMEs production capacity had deteriorated, collections and payments were delayed, profit margins were diminished and the credit requirements had escalated. This research outcome will provide an insight to the policymakers and financial institutions in India to implement and revamp strategies that will enable the SMEs to revive from this challenging environment successfully.

Highlights

The Indian Goods and Services Tax (GST) tax regime was aimed at replacing a range of taxes with a new, unified system of indirect taxation nationwide proclaimed as “One Nation One Tax”
Return of Assets (ROA) and WCSG were used as dependent variables and Quick ratio (QR), Current ratio (CR), Debt to equity ratio (DE), Conversion Cycle (CCC), Net profit margin (NPM), and Total Equity (TOTE) were used as control variables in the models
The results indicate that increased Average collection period (ACP) interrupts the cash cycle and eventually delays the Inventory conversion period (ICP) and sales

Summary

Introduction

The Indian GST tax regime was aimed at replacing a range of taxes with a new, unified system of indirect taxation nationwide proclaimed as “One Nation One Tax”. With a revamp in the timelines of availing line of credit under the new GST regime, SME’s short term cash flows was affected significantly and forced the firms to look for new sources of working capital finance. This results in increased operating expenses and decreased liquidity which indirectly impacts the financial and operational sustainability of SMEs. This results in increased operating expenses and decreased liquidity which indirectly impacts the financial and operational sustainability of SMEs Against this backdrop, this paper aims to explore the GST shock on SMEs working capital in India

Objectives

Methods

Findings

Conclusion