Bengaluru/Mumbai, Sept. 6 -- The recent cut in goods and services tax (GST) rates on several consumer items is expected to block the working capital for stockists, distributors and retailers holding inventory for a short period, experts said. This is because such firms would have paid GST to their suppliers at a higher rate under the older regime. However, when they sell their inventory to customers, they would receive tax at the newer, lower rate. So their tax liability would be less than the input credit they receive, blocking working capital as credit on their GST ledger. The impact will be acute for micro, small and medium enterprises (MSMEs) engaged in the distribution of consumer goods as they, along with retailers, typically operate on slim profit margins of 3-5%. The blocked capital could take from weeks to upwards of a year to offset for a firm depending on the size of its inventory and margins, experts pointed out. Companies get credits for taxes paid on inputs that go into their businesses, and these can be set off against future liabilities. The accumulation of excess input tax credit was an issue in the past, too, whenever the tax rate on any item was rationalized. However, considering rates have been slashed simultaneously for items across the board, this makes it a much bigger challenge, they said. "Inventory bought at higher GST and sold at concessional rates locks up credits that cannot be recovered," said Kulraj Ashpnani, partner at tax consultancy firm Dhruva Advisors. "GST rationalisation is a welcome move, but unless refunds are allowed, dealers end up with stranded credits on stock bought at higher rates. The government must step in with a refund mechanism to ensure fairness." Consider this simplified example. A retailer selling household items like hair oil, shampoo, soap and toothpaste will have paid 18% GST when stocking up its inventory. Now, when they clear this inventory after 22 September, when the new tax rates comes into effect, customers will be paying only 5% GST on these products. If such a retailer has an inventory of Rs.10 lakh, they would receive roughly Rs.1.53 lakh as input tax credit on this. However, assuming a 5% margin, their GST liability would be only Rs.52,500 as against Rs.1.89 lakh under older rates. This translates to about Rs.1.05 lakh being stuck as unutilized input tax credit, which could take months to offset....