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

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.