Business Today

Gains For Big Guns

GST has divided industry down the middle-the big guns are smiling, but small traders are jittery
Sumant Banerji   Delhi     Print Edition: July 30, 2017
Gains For Big Guns
Illustration by Ajay Thakuri

As the clock ticked to the midnight of June 30 in the run-up to the introduction of the Goods and Services Tax, arguably the biggest economic reform in India in at least 26 years, different parts of the $2 trillion economy reacted differently-some with excitement, others with trepidation. At the Bengaluru head office of US cola major Coca Cola's bottling arm, Hindustan Coca Cola Beverage (HCCB), the atmosphere was festive. An hour past mid-day on July 1, HCCB raised its first invoice under the new tax regime for a distributor in Karnataka. The firm, like most other big companies in India, had been preparing itself and its business associates for months. A designated team of 100 trainers held more than 70 sessions with its 4,000-odd distributors.

GST subsumes nearly 17 taxes and 23 cesses of different kinds levied on goods and services across India by states and union territories. Its benefits far outweigh the transition pangs and cost of efforts that large companies like HCCB have put to make the value chain compliant with the new structure. "You can give any challenge and India can find a way to make it work," says a beaming Christina Ruggiero, CEO, HCCB, who is only three weeks into her first assignment in India.

At the other end, 53-year-old Darshan Singh, who runs a small textiles and fabric design house in Ludhiana, is staring at a bleak future. Singh buys fabric from mills, processes it, and sells the re-designed fabric to bigger firms. In order to claim input credit, those companies now want Singh to provide them with a digitised GST compliant invoice. Completely at sea with the new structure, he has already seen orders dwindle as some clients have moved away to those already registered with the GST network.

"I tried to learn about GST but it is complicated. I am not well versed with computers. I will have to hire a chartered accountant but they do not come cheap," he says. Under GST, every business establishment has to file three returns in a month, but the government has clarified that any trader or retailer will need to file only one return, while the other two will be auto populated. It has also clarified that invoices need not be generated on a computer. Only once every month would it need to be filed online.

The benefits of GST are obvious. As check points at state borders - that acted as excise or entry tax collection booths - disappear, the flow of goods will be much smoother, faster and cheaper. According to CRISIL Research, the cost of transportation and warehousing could dip by 20 per cent.

Replacing multiple taxes with a single tax also makes accounting easier. GST rewards tax compliance by way of input credit - the refund for any tax paid on raw material. This would mean higher revenues for the government. It also lowers the cost of goods and services. However, big companies with digital tax processes stand to gain more than smaller firms and traders like Singh may find the new system daunting.

"While the larger corporates are well prepared, SMEs and other trade participants are struggling to understand its impact and procedures," says a Motilal Oswal Securities report. "This is likely to create disruption in the near term."

"The rules and regulations are complicated and small traders will never be able to comply," says Vijay Prakash Jain, Secretary General, Bharatiya Udyog Vyapar Mandal. "Many businessmen do not have computers. What are they to do?"

"GST is an advantage for people like us who pay taxes. We benefit compared to those in the small-scale sector that do not pay taxes and compete unfairly," says Sunil Wadhwa, CEO, Groupe SEB India, which makes Maharaja Whiteline juicers and mixers.

Messy run-up to a smooth roll out

Despite being a major reform, GST has ushered in a period of confusion and disruption across the economy. In the days preceding the June 30 deadline, manufacturers and retailers scrambled to reduce inventory to minimise any impact of price rise in the post-GST era. In the last week of June, retailers offered massive discounts.

It resulted in a palpable, if temporary, slowdown in production of goods, even though the actual roll out has largely been smooth. Automobile companies reported tepid sales in June, while in other sectors, the impact has been visible ever since the tax rates were announced in mid-May.

"June was a washout as far as sales are concerned. In fact, mid-May onwards every chartered accountant consulted by traders advised them to cut down on stocks. They cannot be faulted because the government never clarified what was to be done with stocks," says Wadhwa.

Calculating the right price for any product after taking into account all input credit is proving to be a tough task for industry. In the erstwhile system, the cascading effect was such that even the most efficient manufacturer did not know for sure the actual price of its product when the entire input credit in the value chain was factored in. The anti-profiteering clause to check any instance of a manufacturer not passing on the benefit has made even large firms nervous.

"Even after a week of GST, we are still calculating the exact benefit. And we have been on it for at least a month," says a top official with a leading car company. "It will take much longer to arrive at the right price. We are talking about prices of thousands of components here. The more complex a product, the more complicated is its pricing."

Teething problems and clarifications

The best efforts of the government notwithstanding, it is a given there will be multiple clarifications and rule changes in the near future. In the first week itself, the government issued two major clarifications - a concessional 5 per cent rate for devices for physically disabled and final rules for transition provisioning or inventories from the pre-GST period. The latter was clarified with a forward input tax credit of 90 days instead of the earlier 60 days for stocks lying unsold up to June 30. At the same time, dealers and manufacturers were also allowed credit of up to 60 per cent on unsold inventory of goods that attract GST of 18 per cent or more and 40 per cent on other goods. However, any change in price of unsold stock would have to be re-labelled separately on the pack while an increase in price has to be advertised in at least two newspapers. "This cannot work. Do you expect a retailer to sit through the night calculate the increase or decrease of the prices of all his stock, print labels and paste them on every product?" says a leading retailer. "That is not his job. By being so high handed, you are forcing him to disregard the government."

While that has allayed some fears, the confusion does not merely end at that. The issue of what happens in the GST regime to taxation benefits-largely on excise-promised by various state governments in lieu of setting up manufacturing facilities, is being raised by industry. Though Revenue Secretary Hasmukh Adhia clarified that state governments are free to reimburse any tax from its own coffers, there is still confusion on the matter. "State governments have told us that they do not have the resources to reimburse any tax exemption given to us in the past," says an executive of an auto parts firm. "So we have approached the centre for a clarification."

There are also sector-related issues where industries are waiting for clarity. The multiple tax slabs for footwear and garments based on retail price or for hotels and restaurants based on their turnover, facilities or tariff have also created many blind spots. Then there is the government's unpreparedness and subsequent deferment of the e-way bill system, which would have paved the way for smooth flow of goods across all states. The confusion has affected the transport system in the country with reports of a near 50 per cent fall in cargo movement on some routes.

"There is confusion right now. It should take a quarter to settle down," says Shalabh Chaturvedi, marketing head for Case Construction India. "There are many input credits which would be realised at the end of the quarter. Once that cycle is complete, only then will people get confidence on the readiness of the administrative system for taxation."

The country's formal economy may be the biggest beneficiary of GST, but its success depends solely on the ingenuity and survival instinct of the large number of small enterprises.


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