New Delhi, May 22 (UNI) The transition to Goods and Services Tax (GST) will disrupt the working capital cycle of businesses in the initial phase and thus easy liquidity in the system is essential for two to four months, says India Ratings and Research (Ind-Ra). The agency believes that in order to minimise the magnitude of such disruption at the earliest, and to absorb the sudden changes in requirement of short term finance, easy system liquidity is necessary. Ind-Ra studied a sample set of 11,000 corporates and estimates that the input credit lock up for this sample could be around INR 1 trillion of which about INR500 billion could be blocked for about two months which may result in higher short term working capital requirement for businesses in the near term. Ind-Ra’s sample set of corporates showed that the task is humongous and can be gauged by the size of closing inventory of around INR11.2 trillion as at FY16, which are at various stages of production process and includes other inventory procured at various dates from different sources including CST, VAT and exempt purchases. The average excise duty of the sample set works out to around 5.5 per cent. Further assuming that 25 per cent of the over-all inventory is procured locally and is subject to an average VAT rate of 14 per cent, the over-all input credit lock up will be around INR1 trillion for this sample and would be higher on an over-all basis. Even if 50 per cent of this is not available for set-off during the transition phase, it would result in blockage of INR 500 billion of input credit for about two months (although may not necessarily be used during the first two months). Moreover, service tax rates are likely to increase by a flat 3 per cent to 18 per cent as against 15 per cent. These factors may put stress on the short term working capital requirement for businesses. UNI ADP RSA SHK 1504