GST makes life tough for MSMEs in Peenya

Krishnamurthy, a job contractor at Peenya Industrial Estate, took home about 10% of his turnover every month. But that was before July 1, 2017. However, post-rollout of the Goods and Services Tax (GST), he is not only left with any savings, but is also burdened with soaring debt (He has borrowed a personal loan of Rs 9 lakh to finance his business and pay GST on behalf of his customers), as he has been forced to pay 18% GST on the components he produces, much before his credit cycle gets over.

His credit cycle is three-months long, but he has to file GST by 28th of every month, even if his customers have not made the payments, blocking his much prized amount in the credit cycle for little over two months. Although, in the past, he had to deposit his Value Added Tax (VAT) by 20th of every month, but that was not an issue for him as the tax rate under the previous tax regime was just 5.5%.

Krishnamurthy is not alone in this struggle for survival. There are over 6,000 small businesses in Peenya alone and an estimated three lakh units across Karnataka that are fighting all odds, courtesy GST. Peenya Industrial Estate is home to over 12,500 micro, small and medium enterprises, of which around 7,000 units are job contractors. As per the GST rules, these businesses are exempt from registering with GST authorities, as their turnover does not exceed Rs 20 lakh.

Traversing through the narrow alleys, many of which are non-motorable, in one of the Asia’s largest industrial estates, situated on the outskirts of tech city Bengaluru, one can come across many such small businesses and job contractors who have a similar story to tell post-introduction of GST.

Another job contractor in Peenya, Kempegowda, who runs a small business with only one machine and one worker also complains about long credit cycle impacting his finances. “I have to pay 18% GST upfront. We have to pay these taxes immediately after the sale, but our credit cycle is atleast 60-90 days,” he says.

He was not paying any tax earlier as his turnover is less than Rs 10 lakh per annum.

In fact, Prime Minister Narendra Modi, in his speech on the first anniversary of GST said, “It would have been very simple to have just one slab, but it would have meant we could not have food items at 0% tax rate. Can we have milk and Mercedes at the same rate?”

Making this statement, Modi negated single-tax rate under GST, as suggested by the outgoing Chief Economic Adviser Arvind Subramanian.

Regression and hypocrisy

“The irony is that while the Prime Minister talks about the progressive tax, GST is regressive in nature. In most of the cases, the job contractor, the manufacturer and multinational companies fall under the same tax slab - in most cases it is 18%,” a tax analyst, who did not wished to be named, says.

Due to this anomaly, many job contractors have seen their finances go for a toss. While the large corporations seem to be enjoying the input tax credit they get under GST, the job contractors at the bottom of the manufacturing rung suffer the most.

“Our job is facing a lot of stress because of it. We are not able to save because of the new tax regime,” one of the job contractors in Peenya told DH.

Though the small-scale industries are not facing much stress after GST, they seem to be affected by a cascading effect of job loss.

In fact, SME manufacturers seem to have benefited from GST - but only in case they were paying both VAT and Excise Duty earlier. In that case, their effective tax rate has come down from 19% to 3.5%, courtesy GST.

“GST has in a way benefited us, even as our businesses are facing severe stress and our business associates are the worst hit,” says Shrinath Bandhary, Managing Director, Innospacer Engineering Technologies.

However, for Ravikiran Kulkarni, Proprietor of machine tools-maker Qualidels in Peenya, it has been a “no gain, no loss” situation after the GST rollout. But, he is also facing stress, as he has to reduce the credit cycle for his business associates, who are reeling under the burden of paying advance GST.

The Karnataka Small Scale Industries Association (Kassia), an apex body of SMEs in Karnataka, has been demanding reduction of GST to 5% from 18%, and removal of the trade credit cycle system.

Despite strict guidelines from the government for payment of dues within two months, many original equipment manufacturers (OEMs), including the public sector defence PSUs in Bengaluru, do not pay vendors before 120 days (fpur months), many SMEs in Peenya inform DH.

Facade

Although the government has exempted businesses of below Rs 20 lakh annual turnover from registration under GST, job workers are forced to register. Otherwise, they will not get employment at large enterprises, who have been told to buy only from registered enterprises in the garb of formalisation.

“The sorry tales of Peenya show that the rich seem to get richer and the poor seem to get poorer after the introduction of GST,” a job worker, who is engaged in powder-coating business says.

According to Kassia, exemption under GST is a myth.

“SMEs face input credit problems. Unless the purchaser files his returns, the supplier cannot claim input credit, which is quite an anomalous situation and needs to be addressed quickly,” says Basavaraj Javali, the newly elected President of Kassia.

These are not the only issues pertaining to GST. Despite GST officials claiming that they are not receiving many complaints, industry has a different tale to tell. “The GST grievance cell is ill-equipped to address grievances as it cannot attend to all the grievances raised from different corners of the country, pertaining to varied numbers of industries, which may have their own peculiar problems,” says an SME manufacturer.

Job losses

Krishnamurthy used to employ 16 workers a year ago. But now his workforce has come down to 10 people. The increasing costs of GST along with the enforcement of the Minimum Wages Act, he has been forced to reduce the head count. “I am not alone. Many of my friends in Peenya are facing the same situation,” he says.

The members of Kassia fear that thousands of jobs may be lost in the coming days, if their concerns are not addressed by the government immediately. “If the same situation persists for the next two years, there could be suicides by job workers, like farmers, owing to increasing debt,” a Kassia member said.

Currently, close to two lakh workers are dependent on the manufacturing units across Peenya Industrial Estate.

Some make merry

However, there are some people who have made merry out of the GST. A Marwari job worker, who does not manufacture equipment meant for OEMs and has multiple trade outlets in Chickpet, has convinced his buyers to reduce the credit cycle to 30 days, thereby, helping him earn interest over the next 28 days, till he pays GST. “I am very happy with GST,” he quips.

There are many difficulties associated with the e-way bill, which, according to government, is aimed at increasing compliance level.

According to Kassia, they have been finding it difficult to take the transporters’ details since they pick up from manufacturers in LMVs and then load onto heavy vehicles from their office.

“As such, we can give only transporters’ name, but the details of the transporting vehicle are difficult to mention in the e-way bill,” according to Javali.

While problems are many, the miseries at the bottom of the rung are real. However, the government is busy patting its own back for the move it thinks is a marvel and is living in denial. A wake-up call, indeed!