GST Has Ruined Small Businesses

On July 1st 2018, the Goods and Services Tax (GST) completed one year. The Modi government introduced it to replace the patchwork of indirect taxes that existed at the time with the goal of improving tax compliance. One year’s experience shows that it has decisively shifted the economic balance in favour of bigger businesses leaving small and medium ones struggling. Most of the micro or tiny enterprises continue to struggle outside its ambit. Newsclick looked at several media reports that investigated various types of industries to assess GST’s impact on the ground.

The Quint published a report analysing the effect of GST in the textile hub of Surat, in Gujarat. As per the GST laws, power looms have been barred from seeking any input tax credit refund. Last year’s massive protests by Surat’s textile businesses against GST stopped all work for a period of 20 days leading to a loss of over Rs 100 crore across the market. The Modi government in response announced a cut in GST rates just days ahead of the Gujarat Assembly elections in December 2017. However, the damage had already been done. Power loom units in Surat’s Pandesara area are now either partially operational or running below capacity. Others are being sold in scrap.

Zari, which goes into making expensive Benaras and Kanchipuram sarees has also been burdened by GST. The once flourishing zari industry of Surat is in doldrums after it was taxed 12 percent with the rate kept uniform for both genuine and imitation zari. After several sittings, the GST council reduced the 12 percent tax to 5 percent on genuine gold and silver zari. But, the manufacturers still have to pay Rs 2000 as GST on every 1 kg of zari which costs roughly Rs 40,000.

Other than those workers that are paid a monthly wage in factory units, many workers in the textile business are given raw materials to process from home.  These workers, also known as ‘on-job’ workers, were also affected by the imposition of GST.

“With GST on job-work, labourers and workers who never created a receipt in their lives now have to calculate and pay GST according to the goods he produces. Since these labourers don’t even have a GST number and their turnover is nowhere near Rs 20 lakh a year, we bear the tax burden and pay less to the labourer who does job-work. Now they are phasing out of the business because of poor returns.”  Bipin Jariwala, secretary of the All India Zari Federation, told the Quint.

As a result of this turmoil, thousands of embroidery units have shut down in Surat. Just like the power loom sector, unit owners here are selling their machinery for scrap as they are not able to manage the GST burden. Machines costing Rs 10 lakh are being sold for Rs 2-3 lakh. That is a 70 percent capital loss. As a result, an industry that employed a million labourers, today employs only around three lakh workers, which means a total of about 7 lakh jobs have been lost.  

Traders were also adversely affected, hundreds of shops that were in the textile business have closed down in Surat because of the double impact of GST and demonetisation. Retailers were made to ensure bill to bill payments from buyers after the imposition of GST, this affected their turnover heavily and caused many to quit this business.

The Scroll in a report on the completion of one year of GST, provides a harrowing picture of the GST effect on different sectors of the economy.

Big manufacturing companies in Hosur in Tamil Nadu benefitted from the tax, as the Hosur Industries Association maintained that the tax was overall good for business and the adverse effects have been very minimal. Most members of the Hosur Industries Association are large companies like Ashok Leyland, Titan and Venkateshwara Hatcheries. On the contrary the president of Hosur Small and Tiny Industries Association, while speaking to Scroll,  had outlined why GST was hurting them and other members of his association. The biggest issue according to him was the 28% tax on auto-component makers. Not only did this quadruple the tax they had to pay, it also triggered a 20% jump in their working capital needs. These companies had to pay GST at the time of sale but their customers only pay them after a 90-day credit period, as is standard practice in business. As a result, members were taking loans to avoid defaulting on tax payments. The number of MSMEs [micro, small and medium enterprises] in Tamil Nadu has fallen by 50,000, from 2.67 lakh units in 2016-17 to 2.18 lakh units in 2017-’18 according to reports.

In Assam, under GST, raw bamboo and cane were initially taxed at 5 percent and finished products at anywhere between 12 and 28 percent. After revision in November, bamboo and cane products are now taxed at 5 percent. Besides, the rate of tax for cane and bamboo furniture has been brought down to 12 percent. Only cane furniture or other value-additions is taxed at a higher rate of 18 percent.

Gyanendra Kalita, who manages the Guwahati branch of the Assam government’s flagship chain of handicrafts retail outlets, Pragjyotika Emporium, had told Scroll.in in October that “everything that can go wrong has gone wrong”. Average monthly earnings at his emporium had plummeted from Rs 30 lakhs in June 2017 (the month before the new tax regime was introduced) to less than Rs 12 lakhs in September 2017.

Apart from plummeting sales, traders also had to cope with the effort of filing tax returns three times a month. However, over time small businessmen have adjusted to the new process of paying tax. Given the higher tax slab, sales of high-value items like cane and bamboo furniture are still not impressive. Naveen Sood, who owns Canecraft and Allied Industries, a company that supplies furniture to the Assam government’s emporium, told scroll that there had been a “60% decrease of furniture sales”.

Mumbai’s printing and paper products sector faced a lot of problems because of GST. Cash flow had reduced for small businesses, leading to a considerable slowdown in the industry. The industry saw a dip in buyers and a fall in turnover after the tax was imposed. There has been a shortage of working capital as well, which has caused employers to lay off many workers. End products have become more expensive.  

Small business in the age of GST are heavily disadvantaged. Although businesses that are  worth less than Rs 20 lakh don’t require GST numbers, but clients only want to deal with those who can give them GST numbers so they can gain credits. Hence, the small businesses lose out to the big companies.