Two weeks have gone by since the Goods and Services Tax (GST) came into force. Yet, confusion and doubts still persist. Small and medium enterprises (SMEs), exporters and traders alike are still struck by a sense of uncertainty, and are hesitant to make their first purchases or raise the first sales invoice.
The Indian arm of Danish major Danfoss, which used to receive 25% of its monthly orders in the first week of every month, had secured orders only for 5% of the monthly average in the first week of July. Lynk Logistics, a Ramco Cements group company, which saw a huge surge in its bookings in the last week of June, is witnessing a dip in its order book.
Members of the Madras Electrical Trades Association have forewarned about a 10% increase in the sale prices, though there has been a marginal decrease in tax rate. An upset Sivakasi Firework Association went on strike to protest against exorbitant GST tax rates. It was, however, a different matter that they withdrew the strike subsequently. Chennai-based Sivanandha Pipe Fittings, which does exports and deemed exports, has been facing short-term liquidity crisis as close to 20% of its working capital is locked in inventory.
All these may appear as stray cases. These, nevertheless, give a clue to the after-effects of the GST roll-out.
The National President of All-India Manufacturers’ Organisation (AIMO), K. E. Raghunathan said that the SME sector was not fully prepared for the ‘untimely roll-out of the new tax regime’. The new order has put the SMEs in a spot, he said. They have to contend with a host of avoidable problems such as stagnation in existing orders, strapping of fund flow and non-payment of salary to workmen, according to him.
“No one disputes the long-term benefits of GST. But the concern is on timing and methodology,” he said. “Lack of awareness, knowledge of users and software updates by service providers have only helped to confound the confusion.” Why did the Ministry take almost a week to release the app on tax rates and not before it, he asked?
In the wake of declining sales, the Madras Electric Trades Association has called for the simplification of rules as it finds it hard to move goods from godowns to the shops without invoice.
For Karthik Venkatesan, managing director, Sivanandha Pipe Fittings Ltd., the introduction of GST is a double whammy.
‘Locked up capital’
“We have to pay first and then claim input tax credit later,” he said. “So, my raw material cost will go up by 18% and that amount will be locked up as IGST input tax credit. The time-frame for a refund is 120-140 days. Again, I have to import raw material, so another 18% gets locked up,… indefinitely. For a small enterprise, it will be a huge blow.”
“Till recently, we imported seamless steel pipe on advance authorization basis without payment of basic customs duty, safeguard duty, countervailing duty and special additional duty. After the implementation of GST from June 1, these same advance authorization licences are valid for only basic customs duty and safeguard duties, with said import now attracting GST at the prevailing rate for that tariff code,” Mr. Venkatesan said.
Till before the roll-out, the company’s sales to the merchant-exporter was cleared without payment of duty. As the product was meant to be sold outside India, no excise duty or sales tax was collected. “But things have changed now, and this will affect our liquidity”, he added.
The Federation of Indian Export Organisations, AIMO and other export promotion councils have made representations to the Union Commerce and Finance Ministries to support small and medium enterprises by directing banks to lend the tax component as interest-free loans, along with working capital loans.
“The need of the hour is to support exporters and grant increased access to working capital from banks to tide over this short-term liquidity crunch,” Mr. Raghunathan said.
Exporters are facing serious liquidity crunch under the new regime, which envisages refunds as against upfront exemption available earlier. Even though timely refunds have been promised, practically, the cycle will take two-to-three months and this will effect the working capital requirement and cost of final products by 2.5% to 3%, said A. Sakthivel, chairman, FIEO Southern Region. The body has urged the Centre to address the issue of deemed exports at the earliest, ‘failing which SMEs will be the worst sufferers,’ he said.
Mr. Sakthivel said that the composite drawback rates would add to the transaction costs and time. Pre-GST, exporters were allowed self-declaration of composite drawback rates. That should be continued with the same facility in the current GST regime instead of requirement of certificates from the department, he said.
The implementation of GST is still in its early days. So, it is extremely important to assess the challenges which exporters have come across in the initial few days at the ground level. “The Centre is clarifying the issue on a daily basis and whenever needed either through FAQs in newspapers and social media. Any new tax regime is bound to have initial teething problem. We should give some more time, instead of blaming the Government,” an FIEO spokesman, nevertheless, said.