Why Indian Businesses are Facing a “Messy” Cash Flow Problem under GST

GST rate cuts, while intended to boost the economy, have created a significant problem for many businesses: an inverted duty structure. This happens when the tax rate on a company’s raw materials is higher than the tax rate on its finished products.

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Here’s why this is a major concern:

• Cash Flow Is a Mess: When businesses pay more tax on their inputs than they collect on their sales, they end up with a surplus of Input Tax Credit (ITC). This excess credit is essentially money tied up with the government that they have to apply for as a refund. Delays in receiving these refunds can create major cash flow issues.
• Loss of Competitiveness: If a business can’t get its refund quickly, the trapped tax credit becomes a cost. To recover this cost, the company may have to raise prices, making its products more expensive and less competitive, especially against imports. This goes against the government’s goal of promoting domestic manufacturing.
• A Complicated Fix: Correcting this issue isn’t simple. The same raw material can be used by many different industries, each with a different tax rate on their final product. Changing a tax rate to help one industry might unintentionally harm another. Additionally, rates on essential items like fertilizers are often kept low for political and social reasons, which makes it hard to align them with other tax rates to resolve the inversion.

While the government is working to address these issues, the process is slow and complex, leaving many businesses in a state of financial uncertainty.