Working Capital Pressures and Input Tax Credit Delays Under Gst: Evidence from Small and Medium Enterprises in Bengaluru's Industrial Clusters

Abstract

Purpose:
This study examines the magnitude and determinants of Input Tax Credit (ITC) refund delays under India’s Goods and Services Tax (GST) regime and analyses their impact on the working capital dynamics of manufacturing Small and Medium Enterprises (SMEs) in Bengaluru’s major industrial clusters.

Design:
A mixed-methods approach was adopted using primary survey data from 328 manufacturing SMEs across Peenya Industrial Estate, Electronic City Phase II, Bommanahalli–Hebbagodi manufacturing belt and Doddaballapur Industrial Area. The study combines structured questionnaires and qualitative interviews and applies panel-corrected ordinary least squares (OLS), instrumental variable two-stage least squares (IV-2SLS), quantile regression and bootstrapped mediation analysis to evaluate the relationship between ITC delays and firm-level financial outcomes.

Findings:
Blocked ITC accounts for an average of 21.4% of total current assets among sampled SMEs, extending the cash conversion cycle by about 38 days (p < 0.001). Micro-enterprises experience higher blockage ratios (25.8%), while export-oriented garment and electronics firms face additional delays due to zero-rated supply refund processes. ITC delays significantly increase reliance on informal finance (3.44 percentage points per month of delay) and reduce capital expenditure by 0.41 percentage points per month, with informal credit substitution partially mediating the investment decline.

Research limitations/implications:

The study is limited to manufacturing SMEs within selected Bengaluru clusters; however, the findings contribute to the literature on tax administration efficiency and SME finance in emerging economies.

Practical implications:

Strengthening refund timelines, digital compliance infrastructure and ITC guarantee mechanisms can reduce working capital constraints faced by SMEs.

Originality:
The study provides firm-level empirical evidence linking ITC refund delays to working capital stress, financing behaviour and investment decisions among manufacturing SMEs under India’s GST framework.