On the eve of the implementation of the goods and service tax (GST), it is not business as usual. India is in the midst of its biggest indirect and structural tax overhaul in the world, which if it sails through will add 100-200 bps to the GDP. But will the small companies be able to transition to the new environment? Will the new GST usher in a boom in business? Or will firms wind down their businesses?|
System engineers, however, consider GST a mid-level complex problem. Which means that it can still be cracked without too much coding. But as some of the grey areas in the GST system are still being ironed out; with GST rates still being finalised; clarifications still being issued; GST registrations still being done, invoicing systems still being reworked, this biggest migration exercise is turning out to be a can of worms for corporate India, both large and small — in particular, the small firms.
The Winners
Clearly the winner is the formal sector. In a survey conducted by BW Businessworld, 58 per cent of the respondents in the MSME space were either neutral or disagreed that GST would benefit them. By contrast, 90 per cent of the large firms agreed that GST would benefit large firms.
Such big divergence speaks volumes of the huge divide that grips the new GST landscape. Firms that are large and can deploy new IT networks will see, at most, a flutter in their operations till the systems stabilise. The small and fringe players and those that have not been tax compliant either face the challenges of incurring huge costs to become tax compliant or go the dinosaur way.
Shekhar Bajaj, CMD, Bajaj Electricals says that internally the company is fully ready. “We will only be able to start our billing from after a week or so. The unorganised sector will find it difficult because they will find that every transaction will have a tax and a set-off. So, if he purchases anything without tax, at the next stage, when you charge tax he will not get a set-off,” says Bajaj. “Many small fellows will disappear. Others will come in line and start paying taxes. The disadvantage that the unorganised sector was having because of not paying taxes of 10-15 per cent will not be there,” he says.
GST is a consumption tax, and hence every spoke in the supply chain wheel has to be accounted for. The input credit that firms will get from GST will ensure that businesses will only deal with other businesses that are GST compliant. Otherwise firms will not be able to take credit for the inputs. Hence, purchase of raw materials have to be tracked with finished goods.
“It is disruptive to say the least in the short-term,” says Dun & Bradstreet’s lead economist Arun Singh. “The entire supply chain has to be migrated on the new platform and all businesses have to become tax-compliant. We are talking about a massive change.”
Sectoral Challenges
Besides, different sectors have their own problems. For telecom companies with operations in multiple states, there’s going to be a sharp increase in return filing. Telecom companies collect service tax at a central level, which is then paid to the government. Now, they will have to file multiple returns in different states they operate in.
Banking will also have to comply with state GST laws and hence determine whether transactions are within or outside the state. This classification will be done by the banks themselves, but will often land in the grey zone of how to classify the transactions. As a result, banks will need to decide whether the payment is against Central GST, State GST or integrated GST, the three forms of GST that are applicable.
But for the big companies, the migration may not be difficult, just time consuming. With some more investment in IT infrastructure, the large companies should be easily able to handle the GST rollout. For instance, in the BW Businessworld survey of GST readiness of India Inc., most large firms scored high on readiness on parameters such as IT systems, HR training, supply chain management and accounting.
The GST Food Chain
A more acute problem is being faced by small manufacturers. For a shirt manufacturer in Dharavi, one of Mumbai’s busiest districts and home to scores of small businesses, the odds of continuing to remain in business after the implementation of GST are hard to beat.
The business employs more than a dozen people skilled at making shirts, which are sold in the busy streets and low-cost shops of Mumbai. But the new GST rules may prove to be a dampener. As most organised businesses go, the turnover is usually clocked in cash.
But with the implementation of the GST, the business will have to source material at a higher input cost, raising the costs of the shirt manufacturer. “I am operating on wafer-thin margins, and I will now have to bear higher costs on the raw materials purchased. Business is not good, and the higher costs will impact my business,” says the shirt manufacturer.
It’s a familiar story across the small and medium sector businesses as the post-GST game will throw up challenges for today’s small and medium businesses. As per the annual report of FY16 of Ministry of MSMEs, more than 117 million people were employed in around 51 million working MSMEs in FY15.
Small businesses with a turnover of over Rs 20 lakh now come under the GST regime. Such companies now have to maintain accounts of GST paid and received — and file monthly GST returns. Even smaller businesses like kirana stores, the bills will be voluminous. Large wholesalers that operate under multiple GST slabs too face a challenge in reconciling the numerous bills under various GST heads.
“More than 90 per cent of the unorganised businesses will have to understand what GST means,” says Dun & Bradstreet’s Singh. “They have to redefine their business model, they have to look at product sourcing, supply chain management, start an accounting system, and set up processes for inventory management. All this requires investment. They will need to understand the consequence of not being in the supply chain, and the outliers in the GST regime will be forced to come into the mainstream GST regime,” he further adds.
Under the earlier excise rule, a manufacturer with a turnover of less than Rs 1.5 crore did not have to pay excise duty. But post-GST, SMEs with a turnover of over Rs 20 lakh come under the GST bandwagon. As a result, a large chunk of SMEs will have to enter the mainstream business, or risk the chances of being marginalised.
Says ICRA’s senior group VP Subrata Ray, “Some of the smaller businesses may become unviable in the new GST regime and some may have to incur additional costs.”
Roy also points out that some of the costs are low because small businesses employ unorganised and low-skilled workers, and many of the small businesses will have to formally employ such workers and comply with labour laws that will increase their costs.
Organised players due to their economies of scale may still be able to lower costs and pass them to customers as they gain market share at the expense of unorganised businesses.
What’s making things more complicated in the short term is that India has gone for a four tax structure. This is further exacerbated by three different types of GST, one, Central GST (CGST), State GST, (SGST) and interstate supply of goods and services, that is, integrated GST (IGST). Says Amit Jaiswal, CFO, Royal Orchid Hotels, “GST is good, but we are not able to understand why there are so many slabs. Probably in time to come, the government will have to work it out and bring it into two slabs maximum.”
Supply Chain Overhaul
Further, there are grey areas on the inventory management. Large businesses will have to sort out the issue inventory classification in the old and new regime, which could take months to sort out in cases where there are multiple goods. Some of the inventory has bought in the old era, and therefore, claiming a tax-credit input set-off could be a nightmare, and onerous to prove. In such cases, companies will need additional working capital to fund inventory, and take a hit on margins.
The BW Businessworld survey further notes that the biggest challenge of the small businesses are high costs of migration and lack of awareness, but for the larger firms it is making a provision for training requirements and dealing with supply chain management. In fact, the survey further points out that 76 per cent of the small businesses have not received adequate training on GST as compared to just 41 per cent among larger firms.
However, the survey also shows that MSMEs are more likely to adopt the change and move towards more formalisation of their businesses. Nearly 82 percent of the MSMEs surveyed were confident that they will survive and make the transition to the organised space.
For India Inc., the next few months will be critical. Every passing week is going to make headlines — both good and bad. Systems are also being tested. Templates are being put in place. But whether it will be business as usual for India Inc., the real test will begin only after 1 July.
But corporate India is optimistic. Says Prakash Tulsiani, CEO, Allcargo Logistics: “Any change initially is not openly welcomed. But once the change happens and is accepted and turns out to be good, you get used to it.”