For Rajesh Kapoor, a dealer of power tools and industrial hardware in Delhi, one year of the Goods and Services Tax (GST) reform has meant a 60% drop in sales.
“In the last one year, we’re only able to sell about 40% of what we used to before GST came in. The B2C (business-to-consumer) end of my business has taken a drastic hit. When a customer sees he’ll have to pay Rs 18,000 tax on a purchase worth Rs 1,00,000, he’d prefer to not buy the product from us at all,” said Kapoor.
Kapoor’s business typically sees an annual turnover in the range of Rs 17-18 lakh. Small businesses like his were exempt from paying excise under old tax laws. Goods he sold were only taxed at 5% VAT, but now, under GST, most of the products fall under the 18% slab, and the others are taxed at 28%.
“It’s discouraging customers from buying from us. They’d rather go to a branded store and shell out more money there, since they’re already used to paying more for brands,” he said. “When it comes to filing returns too, work needs to be delegated to a professional now. We can’t do much by ourselves.”
GST subsumes myriad indirect taxes, including excise (or value-added tax levied by the Centre), sales tax or service tax, and VAT imposed by the states into one uniform levy across states.
“The government failed to recognise when it introduced a tax slab as high as 28% that smaller players were not so far paying excise duties so high. These businesses have gone from paying VAT in the range of 5%-12.5% to a GST of 18%, a rate which is highly disproportionate with the revenue these businesses have,” said Hardeep Malhotra, a New Delhi- based chartered accountant. In GST, only businesses with annual revenue of less than Rs 20 lakh are exempt from registration.
Malhotra explains that organised businesses with a turnover of more than Rs 1.5 crore were already paying about 24% in taxes, with the combined levy of sales tax, excise, and VAT. For them, the GST has in fact brought down the effective tax they have to pay, or in some cases, only marginally increased them. They are also better equipped to constantly upgrade the infrastructure needed to file numerous GST returns every quarter, than a small business.
Rahul Madan, who runs a business of mild steel ball bearings, told HT that most of his suppliers from Ludhiana in Punjab have shut shop. “My suppliers from Ludhiana have switched to importing goods instead of manufacturing themselves. One manufacturer who used to employ over 70 people has relieved all of them now, and finds it much economical to import,” said Madan.
“Since the majority of the industry was small and exempt from excise, imports were expensive. But now even the smallest of manufacturers pay 18% GST. Import and trading, on the other hand is much easier. There is no CVD or SAD on exports now, so goods manufactured domestically and those imported have no price difference, making it hard for SSIs to be able to compete,” he added.
Under the old excise law, countervailing duty (CVD) and special additional duty (SAD) were levied on imports to create a level-playing field for domestic manufacturers of goods and cheap imported goods. The CVD was levied at rates equal to the excise charged on a good if it was to be produced locally.
“The biggest challenge for SMEs was the filing of multiple returns — GSTR 1, 2 and 3 on a monthly basis,” said Aditya Singhania, DGM, GST at Taxmann.
“As SMEs found it impractical to handle the quantum of the returns, the GST Council took note of their complaints and introduced an alternative, single GSTR-3B return which is to be filed on a monthly basis, along with the quarterly GST returns. Businesses with a turnover of less than 1.5 crore can opt for composition scheme…the simpler the return format is, the lower will be the compliance burden on SMEs,” he added.
New rules dictate that a GSTR3-B return has to be filed each month by a registered taxpayer, even if they have zero sales in a particular month. “It has been noted that 27% of the taxpayers file nil returns”, said Singhania. This is avoidable work for small businesses which, more often than not, are strapped for resources.
The GST Council introduced the provision of composition scheme in which small taxpayers could choose to file their tax returns at a fixed rate of their revenue every quarter.
However, the scheme doesn’t apply to service providers (other than restaurateurs), and subscribers to the scheme have to let go of the benefit of input tax credit. Businesses which supply inter-state can also not subscribe to the scheme.
The Economic Survey for FY16-17 showed that out of the total returns filed under the GST during the period, 99.4% were filed by SMEs, amounting to 45.6% of the total taxes paid, said Taxmann’s Singhania.
Emails sent to the ministry of finance were unanswered at the time of publishing this story.