GST dries up working capital for auto component companies


CHENNAI: Small manufacturers in Hosur’s automotive cluster have begun sending missives to original equipment manufacturers and suppliers about working capital shortage due to the introduction of the goods and services tax.

These entrepreneurs have to foot a 10 per cent higher tax on products under the new tax regime launched on July 1. They have to set this aside for remittance every month, but payments from clients – who bear the higher tax rate of 28 per cent – usually take 100 days, such businessmen said.

“We have represented to Tier I suppliers and even OEMs (original equipment manufacturers) that there is a threat of default,“ said K Velmurugan, managing partner of JIT Auto Comp, a small manufacturer of pressed steel components.

Earlier, for raw material worth Rs 1 crore purchased, the components maker would pay Rs 17.5 lakh in a cumulative levy of 17.5 per cent of excise duty and value added tax (VAT). Setting off input tax against an equivalent output levy, he would pay tax only for the degree of value-addition in his manufacturing. Now, under the GST system, he needs to set aside 28 per cent of the proceeds from his component sale, but can claim input credit only to the level of 18 per cent, meaning higher tax outgo. Although it is a car or truck maker bearing the 28 per cent levy, purchase contracts are usually 2-3 months long, putting the pressure of tax remittance on the component maker every month and draining that firm’s working capital.

Nearly 1,000 manufacturers in the Hosur cluster, supplying to vehicle makers such as Ashok Leyland, TVS Motor, Volvo and Hyundai, have represented their problem in a letter to Union finance minister Arun Jaitley. The effect of working capital crunch was also discussed at a meeting industrialists had with Jaitley and commerce minister Nirmala Sitharaman on Sunday.

Ranganath N Krishna, managing director at Grundfos Pumps India, told ET that the disruption in cash flow caused by the GST regime was part of the brainstorming, along with a few anomalies in the tax rates, such as “different taxes on the same product due to the difference in their end use“