This ground report from the diamond city captures the travails of small-scale units
A big blow to the industry in the first year was that even though the conversion of texturised yarn into grey fabric attracted five per cent GST, the weavers could not avail of the input tax credit refund.
For 37-year-old Monty Manghani, the year 2017 was a milestone. After years of struggle, the annual revenues from his trading unit in Surat, which houses the country’s largest cluster of synthetic textiles, was about to touch Rs 1 crore.
But Manghani’s success proved to be short-lived. The government implemented the Goods and Services Tax (GST) in July that year and the new tax structure became a challenge for his small unit. Eventually, he was forced to shut shop and team up with his merchant manufacturer father. The duo are now posting a business turnover of nearly Rs 2 crore.
The Manghanis say that Surat’s synthetic textile value chain comprises various verticals, from spinning polyester yarn to weaving grey cloth, which is then dyed and processed before being sold to wholesalers across the country.
Textile traders like the Manghanis, also known as merchant manufacturers, buy grey cloth woven at the power looms and then get work done on it such as dyeing, processing, embroidery and so on, before selling it to the wholesalers.
“Hence, it is the merchant manufacturers who have to pay taxes and account for the same at each stage. This cannot be done by a sole entrepreneur working in an informal manner, unlike in the pre-GST era,” say the father-son duo.
While not much may have changed for Surat’s textile industry in terms of rates, the last five years have seen considerable consolidation, with the bigger players managing to survive and smaller players either exiting the business or joining the larger ones like the Manghanis.
“Overall, GST has been good for the industry by formalising the operations across the value chain. It is now easy to apply for loans or schemes because GST has brought legitimacy to businesses. The only drawback is that not many small and sole entrepreneurs could survive the GST implementation,” Monty Manghani says.
In the first year of GST, the textile cluster in Surat was hit both in terms of tax rates and structure since the entire value chain, from raw material to finished product, goes through multiple stages, each attracting a different tax rate.
For instance, raw materials like polyester partially oriented yarn (POY) has continued to attract 18 per cent GST since 2017, but when turned into texturised yarn, the same saw a change in the rate, from 18 per cent to 12 per cent, in the first year of the new tax regime.
A big blow to the industry in the first year was that even though the conversion of texturised yarn into grey fabric attracted five per cent GST, the weavers could not avail of the input tax credit refund. This was allowed in 2018. However, even today, refund applications take 6-8 months to be processed, which is why industry players prefer not to apply for refunds.
“It is far more convenient to do business by letting the accumulated credit with the government be carried forward to the next year and then adjust it against the tax liability, than to apply for a refund, which takes months to process. Also, the accumulated credit can be set off against payment of taxes for the purchase of new machinery which reduces our capital burden,” says Kamlesh Kotadiya of Renny Fashion, which runs a power loom unit at Pipodara on the outskirts of Surat.
In the five years that GST has been in operation, Surat’s textile industry has witnessed consolidation at two major levels of the value chain — weavers and merchant manufacturers, popularly known as textile traders.
According to Devkishan Manghani, former president of the Federation of Surat Textile Traders Association (FOSTTA) and current advisor to the textile trade committee of South Gujarat Chamber of Commerce and Industry (SGCCI), the correct term is ‘merchant manufacturers’.
“This is because we buy grey cloth from weavers and then send it for processing and other work such as embroidery, lacing and bleaching before selling the finished goods as sarees, dress materials, top wear and bottom wear garments to wholesalers,” he says.
Pramod Bothra, a leading tax consultant for the Surat textile trading community, says that prior to GST, there used to be around 70,000 merchant manufacturers. However, GST, coupled with the COVID-19 pandemic, led to the consolidation of the merchant manufacturers, bringing down their number to around 45,000-50,000.
“Most of the existing merchant manufacturers are those with a turnover of anywhere between Rs 25 crore and Rs 100 crore. The ones with lesser turnover failed to survive,” he adds.