GST 2.0 and your cash cycle: what two slabs did to working capital

On 22 September 2025 India moved to a two-slab GST — 5% and 18% — with the 12% and 28% rates withdrawn and a 40% demerit rate reserved for sin and super-luxury goods. Compensation cess went with it, except on tobacco and related products. Most commentary treated this as a consumer story. For manufacturers it is a working-capital story.

When your output rate falls and your input rate does not

If your finished goods moved from 12% to 5% while your principal inputs, packing material and job-work services stayed at 18%, you have an inverted duty structure. Credit accumulates faster than you can use it. The tax is not lost — it is refundable — but refundable is not the same as available, and the gap between the two is measured in months of blocked cash.

We have seen this land hardest on food processing, textiles and parts of building materials, where the output cut was generous and the input base is services-heavy.

Model it before your bank does

The exercise is not complicated. For each product line, take twelve months of actual data and compute: output tax at the new rate, input tax at current rates, net credit accumulation per month, and the lag between the month a refund becomes claimable and the month it lands.

Three numbers usually surprise the board:

• Peak blocked credit, which is the real number your working-capital limit has to carry.
• Refund cycle time, counted from the end of the tax period rather than from the date you finally filed.
• The transition-stock adjustment, where goods bought at the old rate are sold at the new one.

Pricing is a tax decision now

Where the rate fell, the commercial question is how much of the benefit reaches the customer and how much holds margin. That decision sits with the board, but it should be taken with the anti-profiteering history in view and, critically, it should be documented as a decision with reasoning. A pricing change that is never minuted looks like an accident when someone asks about it two years later.

The unglamorous fix

Most of the blocked cash we see is not structural. It is filing hygiene: refund claims prepared late, mismatched invoice-level data, job-work challans not closed, credit notes issued in the wrong period. A quarterly refund discipline — same week every quarter, same checklist, one named owner — typically recovers more cash than any amount of restructuring.

If your credit ledger has been climbing since last September and nobody has modelled where it peaks, that is the first conversation to have.

There is a second-order effect worth naming. Where the rate cut improved affordability, volumes in several consumer-facing categories rose. Higher volumes at a lower output rate can still increase absolute credit accumulation, so a business can be simultaneously busier, more profitable on paper and shorter of cash than it was a year ago. That combination is precisely the one that surprises an owner-manager watching the P&L rather than the credit ledger.