GST: Future tense for small businesses

It’s a repeat of demonetisation for Surat-based diamond polisher Arjanbhai Ambaliya, who has hardly seen any orders since the roll-out of the goods and services tax (GST) on July 1.

“The international market has been slow. We had just begun settling down to business in May and June. But, since July 1, monthly business is down almost 70 per cent,” says Ambaliya, 46, caught between rough diamond importers and GST non-compliant job workers.  The largely unorganised job worker segment of the diamond industry has been reluctant to join the GST regime, which has imposed a 2.5 per cent levy on value addition.

Rough diamond importers pay 0.25 per cent GST on supply of diamonds to polishers like Ambaliya, who then have to pay 2.5 per cent to 5 per cent on job work, depending on the extent of value addition. Then, when Ambaliya supplies polished diamonds to exporters, the process attracts another 3 per cent GST. "I had long registered under the GST but it is the non-compliance by job workers that is hurting," he rues. The export business of organic and inorganic chemicals is down 50 per cent as compared to May and June for Vadodara-based Prakash Chemicals International. Managing Director Manish Shah is still grappling with the 18-20 per cent additional working capital getting locked under the new regime.

Be it textiles, diamonds or chemicals, small and medium enterprises (SMEs) have had  “slow” or “almost standstill” business since July 1. While SMEs find solace in the government's assurance of being liberal on mistakes in the first month, confusion over the nitty-gritty of the GST is a challenge. 
 

If additional working capital being blocked until they receive refunds is plaguing merchant exporters in industries like chemicals, the Reverse Charge Mechanism (RCM) and un-utilised duty credit have been troubling SMEs in textile clusters like Surat. Unlike the large, centralised, composite textile mills, which buy raw material and make finished goods, the decentralised entities across the value chain — spinning, sizing and twisting, weaving, dyeing and processing, and garmenting — have several procedural hurdles to go through. For instance, a synthetic saree goes through 15-18  stages before reaching the retailer, requiring GST compliance at each stage.

“For a small, decentralised player like us, it is a nightmare to file so many returns. Despite the government’s assurance that job workers with less than Rs 20 lakh annual turnover need not register, the master weavers would end up bearing the tax under the RCM, which will add to the already unutilised duty credit,” says Ashish Gujarati, president of the Pandesara Weavers' Association, which has master weavers as members running a little over 200,000 powerlooms in Surat’s industrial estates.

A typical synthetic saree or dress material goes through multiple processes. Each of these attracts varying GST rates and requires compliance at each level: Right from synthetic yarn, which attracts 18 per cent as input, to another 18 per cent on sizing and twisting job work, followed by 5 per cent each in weaving, processing and supplying woven fabric to a trader. Despite the provision of input tax credit, which gets refunded by the government under GST, master weavers are crying foul over the additional accumulated credit which might not qualify under the refund.

“From synthetic yarn till supply of woven fabric to a trader, a master weaver accumulates additional duty credit of Rs 1.2 per kg, after deducting the input tax credit that would be refunded by the government. However, since this is the first month, we don't know when such a refund would be credited. For smaller players like us, this also means additional working capital being locked up,” says Gujarati. The additional working capital issue is also plaguing the chemicals industry. Companies like Prakash Chemicals and Heubach Colors are borrowing 20 per cent more this month. 

“It is a double whammy for us. Exports have already taken a beating. In addition, as against the previous regime where export oriented units (EoUs) like us were exempt, the GST regime requires us to first pay an 18 per cent duty and then seek a refund, which will take 60 days. There is complete lack of clarity and is affecting us already, when international markets are not in a good shape,” says Shah, who had to borrow Rs 120 crore as against Rs 100 crore as working capital in the previous months to pay the tax. 

Under the new regime, merchant exporters are required to file returns by the 20th of the following month for the 18 per cent tax paid on exports. After filing returns, while 90 per cent of the amount is refunded within seven days of filing, the other 10 per cent takes another 60 days. “The government says this will take 60 days since there needs to be a manual scrutiny conducted by a GST officer. Small merchant exporters, a big number, are very much likely to face difficulty in getting back such refunds,” Shah adds. Ravi Kapoor, managing director of Heubach Colors, says 0.5 per cent to 1 per cent of interest payments on the borrowings would take up working capital to 20-25 per cent.  In fact, in seeking clarity over the procedures, Kapoor saw almost zero business for the first 10-15 days, despite having registered in advance under the GST.

SEEING RED
 

— Loss of almost a fortnight of business due to lack of compliance
 

— Majority of jobwork providers still out of GST net
 

— Master weavers and diamond polishers facing Reverse Charge Mechanism in absence of registered jobworkers
 

— Unutilised accumulated duty credit adding working capital burden
 

— Locking of 18-20% working capital for bank guarantee
 

— Additional 0.5-1% interest payments on extra working capital
 

— Reluctance to wait for 60 days for refund of GST on exports

Textiles

— A synthetic yarn worth Rs 100/kg attracts 18% GST = Rs 18/kg

— The same yarn attracts another 18% GST on sizing and twisting job work of Rs 45/kg = Rs 8.10/kg

— Weaving work on the yarn worth Rs 80/kg attracts another 5% = Rs 4/kg

— A master weaver thus accumulates duty credit of Rs 30/kg

— But master weaver then sells the woven fabric at another 5% GST at Rs 240/kg = Rs 12/kg for 15 metres of fabric

— Master weaver, hence, ends up with unutilised duty credit of Rs 18/kg for 15 metres of fabric or Rs 1.2/kg of additional input credit

Diamonds

— Importer of rough diamonds pays 0.25% GST on supply for polishing

— Diamond polisher pays 5% on jobwork labour

— If jobwork adds 50% value, polisher ends up paying 2.5% GST

— Polisher's supply of polished diamond to exporter attracts another 3% levy

— Whole value chain from import of rough diamonds to export of polished diamonds attracts 5.75%

Chemicals

— Earlier exempt, merchant exporters now have to pay 18% GST on exports

— Merchant exporters are now required to sign bank guarantee and pay 18% tax

— Exporter then has to file returns by the 20th of following month

— On filing tax returns, government deposits 90% of the tax refund within 7 days

— Refund of rest 10% takes another 60 days due to 'manual scrutiny' by tax officials

— Merchant exporters have to, therefore, borrow additional 20-25% on the working capital