MSMEs struggling to be on their feet

It’s been a year since the government introduced the game-changer Goods and Services Tax (GST), but Coimbatore, the hub of MSMEs (Micro, Small and Medium Enterprises), is still reeling under the crisis precipitated by the launch of the uniform tax system and demonetisation of higher denomination notes.

Often referred to as Manchester of South India, this metropolis has an endless list of distress stories – entrepreneurs turning into employees elsewhere, pile up of water pumps, wet grinders and other accessories due to increased cost and job work units shutting shops altogether.

While these industries welcome levying of taxes, they want the slabs to be reduced to ensure that the micro and small-scale enterprises, which are the backbone of the industrial sector, thrive sans any difficulty.

The MSMEs also say that the introduction of the GST immediately after demonetisation sounded the death knell for these enterprises that depends on liquid cash.

“We somehow survived demonetisation after cash inflows became normal. But, even after a year, we are yet to come out of the GST crisis. The government should step in and take corrective measures,” B Balan, who has closed down his lathe unit due to financial losses, told DH.

A recent policy document presented by the Rural Industries Department estimated that more than five lakh people would have lost jobs after 50,000 units shut shop in 2017-18 with Tiruppur and Coimbatore being the worst hit. A majority of the MSMEs have been hit due to the differential GST slab applied on raw materials procured and the cost of the final product and bringing of the job work units under the purview of the new tax. While the raw materials for manufacturing water pumps attract 18%, the tax levied for selling a pump is just 12%.

“The differential slab has wrecked the industry once for all. While we pay 18% tax for procuring raw materials, we sell the product at 12% tax. We lose 6% at the manufacturing stage itself, and how are we supposed to make profits?” asked Kovai Power Driven Pumps and Spares Manufacturers Association (KOPMA) President K Maniraj.

Maniraj, who manufactures water pumps, told DH that the demand for pump sets, the basic need of a farmer, has halved in the past one year and he had to cut his staff strength from 30 to 15.

“There is no other way than downsizing production. What do we do with pump sets if they don’t sell in the markets? Many people who were into manufacturing pumps have shut shop and bid goodbye to the industry,” he said.

Coimbatore alone has 3,000 water pump manufacturers and around 15,000 units that produce spare parts for the pump sets. At least 300 such manufacturing units have shut down resulting in thousands of job losses.

Already, the industry is facing stiff competition from pump manufacturers in Gujarat, who provide 25% margin to dealers since they get a slew of sops like free electricity, insiders said.

“Since water pumps have been a necessity for farmers, the industry should come under the lowest slab of 5% to ensure farming thrives in the country,” Maniraj said.

President of the influential Coimbatore District Small Industries Association (CODISSIA) V Sundaram said that another major problem encountered by the MSMEs is the difficulty in managing the working capital.

“Since manufacturers coming under an inverted duty structure are unable to get refunds from the state GST, MSMEs find it very difficult to manage the working capital. Hence, they are forced to borrow and this has to be addressed immediately,” he said.

The wet grinder industry is also facing the heat due to differential GST slab with the demand for the product plunging by a whopping 40%.

“After several representations, the tax slab was brought down to 18% from 28%. Yet, there is no forward movement, and hence, it should be brought down further since wet grinder is a necessity and not luxury these days,” a wet grinder manufacturer, who wished to remain anonymous, said.
The worst-hit in Coimbatore is the job work units, who have been brought under the tax ambit for the first time since independence in 1947.

The job units largely comprise of five to ten people who work in the confines of their residence and were an integral part of industries that manufacture pump sets, wet grinders, automobile and textile spares.

“Job work units have to pay 18% GST, which is unjustifiable by any measure. Many people who were running small units from their residences have not been able to run them after the introduction of GST,” Coimbatore Tiruppur district Micro and Cottage Entrepreneur Association (COTMA) President S Ravikumar said.

Another problem that the micro-units encounter is the insistence by big companies that these firms should sign up for GST though their turnout is less than Rs 20 lakh a year.

“The government says these firms whose turnover is less than Rs 20 lakh don’t have to register. But big firms don’t engage them unless they come under GST ambit. This puts an extra burden of 18 % tax on these small firms,” Ravikumar added.

Escaping taxes

The big firms do not want to take the tax burden on them, and hence, they force these job work units to register for GST or stop giving orders to them.

Echoing similar sentiments, Sundaram also supported the demand for bringing down the GST slab for job work firms from existing 18% to 5%.

“If this is not done, the job order industry would be very badly hit due to working capital shortage,” he said, and added that the reversal of Input Tax Credit (ITC) by the buyer for non-payment of bills within 180 days from the date of supply is unfair and leads to unnecessary complications.

Vanitha Mohan, President of the Coimbatore Chapter of Indian Chamber of Commerce and Industry, agreed with majority of the demands of the MSMEs and found fault with the government for rushing through a major reform like introduction of uniform tax system.

“It is the duty of the government to go out to the ground and find out why the industries are suffering. The government cannot be skewed and it has to conduct a survey on the industries that have been worst-hit due to GST and find out where and why they have lost,” she told DH.