Transition to GST: Banks, insurers say systems in place despite challenges

With the implementation of GST less than a week way, experts have warned of a short-term liquidity shortage as there could be input credit lock up of of over Rs 100,000 crore, of which close to Rs 50,000 crore could be blocked for about two months.

Written by George Mathew | Mumbai | Updated: June 26, 2017 4:00 am
gst, gst rollout, goods and services tax, indian express With the implementation of GST less than a week way, experts have warned of a short-term liquidity shortage. (Illustration)

The financial sector is pushing hard to put in place the processes for a smooth transition to the Goods and Services Tax (GST) regime on July 1. While bankers and insurance companies said they are gearing up with changes in software and other operational matters, they don’t rule out troubles like liquidity issues for the corporate sector in the first two or three weeks. Bankers reckon that it may three-four months for the dust to settle down.

There were lingering doubts about the readiness of banks to handle GST at the state level till last month with changes from the previous method of circle-level filing of data. However, the Indian Banks Association (IBA) said banks are ready for the transition. “About ten days ago all the banks came together for a meeting to check the preparedness. By and large everybody seems to be prepared. The feedback that we got was that by June 30, things would be fine and in place,” IBA chairman Rajeev Rishi said.

There are 88 commercial banks with branches across the country. There are hundreds of co-operative banks and regional rural banks too. “I was checking my bank’s preparedness… we conducted some pilot runs. Before that we were keeping our fingers crossed. Everything seems to be well,” said Rishi, who is also Central Bank of India’s CMD.

A month ago, the IBA had informed a Parliamentary Standing Committee that lenders were not yet geared up for GST implementation. The IBA note said that several services are centralised while several others are localised. “That was quite sometime back. We never said it won’t be done. We said it was going to be a challenge. Everybody was working on it. There won’t be any issues,” Rishi told The Indian Express.

According to a nationalised bank’s CEO, lenders need to be registered in states where branches are located. “We have got registrations done. It was not done manually. It was a question of systems being put in place… there’s no question of any rise in costs or delay,” he said.

Private banks also said they are ready for GST. “From our side we are ready with the required changes. But nobody knows what’s in store in the first few days. There could be some hiccups, but the systems are ready. We are keeping our fingers crossed,” said an official of a leading private bank.

Banks and insurance companies have already informed customers that services would now be taxed at 18 per cent instead of 15 per cent earlier. “This means credit card and similar services will cost more. Compliance costs are also likely to go up,” said a bank official. While there are doubts if banks are ready to handle GST at the state level. Bankers say they’re ready to tackle this issue.

Insurance policy holders will have to bear the burden of the additional expenses being incurred by the companies due to the new tax system that will be put into place, V Manickam, secretary general of Life Insurance Council. With the GST structure, an insurance company will have to fill 1,800 forms under the new regime which would eat into a lot of productive time. Large firms will have a tough time registering in each state, he said.

Naturally, there would be teething problems as a new system is being implemented. “However, we expect approximately 3-4 months to stabilise,” said an insurance official.

With the elevation in the tax rate to 18 per cent, the cost of buying insurance and keeping the policy active will increase marginally, insurance officials said. “GST is a welcome move in terms of a simplified structure and the overall economy will benefit. As a company, we are in the process of getting ready for implementation. Insurance penetration levels across categories is very low, especially in the health insurance segment. A lower tax slab could have greatly enhanced the ability of the industry to increase penetration,” said Mahesh Balasubramanian, MD & CEO, Kotak General Insurance.

Insurers said the industry would be ready to implement the new national one tax plan except in Jammu & Kashmir. “We are not yet clear on J&K. Maybe, they would join in next four-five days. If they don’t join then we continue the old system for them and the customers continue to pay the old rate,’’ said an official.

The general insurance business will get streamlined as every B2B or B2C transaction will now be recorded. General insurance companies will tend to do business with registered dealers in order to capture GST credits. As additional GST credits on account of procurement of goods, which was not available to general insurance companies, under the current indirect tax regime, will now be available under GST.

However, with the implementation of GST less than a week way, experts have warned of a short-term liquidity shortage as there could be input credit lock up of of over Rs 100,000 crore, of which close to Rs 50,000 crore could be blocked for about two months.

The transition to 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). It studied a sample set of 11,000 corporates and estimates that the input credit lock up for this sample could be around Rs 1 lakh crore of which about Rs 50,000 crore could be blocked for about two months which may result in higher short-term working capital requirement for businesses in the near term.

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