Despite the massive disruption to small and medium enterprises (SMEs) across the country, anecdotal evidence suggests most of them broadly support the goods and services tax (GST). Yes, they do have their grievances about it. But these relate to the abnormalities in the rate changes, the complexity and cost of adhering to it and the haste with which they have been forced to adopt it.
While the rates have come down on many products, there are others where they have shot up overnight. Paint, shaving cream, chocolates and ice creams now attract the highest tax slab of 28% while phenol and detergents, both items of household use, are up to 18%. It isn’t the extent of the hike as much as explaining the consequent price hike to customers that has most traders worried.
At the retail end, the problems are compounded by the complexity of computing it.
A kirana shop owner selling several disparate items to a customer has to charge separate GST rates for each of the items and then add them up for the final bill. It is an onerous and time-consuming job, particularly in a business where a quick turnaround of customers is very important.
Small businesses have also been hit by their own partial unpreparedness. While it is easy to be critical of small businessmen and women for not anticipating the changes and preparing for them, let’s not forget that the various political formulations in the country took 17 years to complete the process that started in 2000 when the Atal Behari Vajpayee government first set up an empowered committee to deliberate on the issue.
It isn’t simple for a five-man operation running a business in footwear to suddenly register, switch to GST format and then institutionalize the rigor and computing skills needed to maintain it. Already opportunistic consultants are on the prowl, offering to handhold traders in their migration to the new tax regime. These are additional costs, unaffordable at current levels of profitability.
The initial glitches in the GST Network (GSTN) portal too put off a lot of first-time users. In fact, at its 21st meeting held on 9 September, GST council approved wholesale extensions in deadlines for filing of GST returns since the GSTN portal had not been working properly.
In any case, it isn’t like stocks have been flying off the shelves in stores. Small retailers are already weighed down by the onslaught of e-commerce with its free funding model that allows them the luxury of deep discounting regardless of business viability. As Flipkart’s chief executive officer (CEO) Kalyan Krishnamurthy told Mint, “(Cash) burn is not a metric that anybody worries about any more. And with the fundraise, burn is almost irrelevant".
Try telling that to a kirana shop owner.
But these complaints are not deal-breakers in themselves. Most SMEs run by second and third generation entrepreneurs recognize the need to move into a newer, modern way of doing business. They recognize that many of the problems related to their inability to raise funds at reasonable rates have to do with the way their books have been dressed up all these years. If you show that your official sales figure is only a fraction of real sales, obviously with the intention of suppressing taxes, banks and lending agencies will perforce give loans in relation to those numbers. That’s forced most of these businesses to seek informal sources of funds, at exorbitant rates of interest. In some cases, short-term loans to tide over cash flow problems, can cost as high as 3% a month.
Eventually, India’s SMEs will adjust to the new tax structure. The learning curve is steep and will entail extra costs. But they have no option but to soldier on.
Till then, they could do with some empathy. West Bengal finance minister Amit Mitra has already asked the finance minister to allow small enterprises with a turnover not exceeding Rs75 lakh to file a quarterly return even while the tax payment continues to be monthly. Further, he also suggested allowing them to raise a single invoice or bill for both exempted and taxable supplies as against the separate ones they are currently required to issue.
SMEs will eventually make or mar the success of the intrinsically sound new tax. Supporting them at this early stage is in the interests of the overall economy.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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