THE Goods and Services Tax (GST) regime created a new category of ‘composition’ dealers in its bid to broaden the tax base by taking into its ambit small businesses — mainly trading houses which hitherto paid no tax at all. Small manufacturers under the MSMEs (Micro, Small and Medium Enterprises), left with no option but to choose the Composition Scheme because of their small turnovers, were discriminated against vis-à-vis traders by the new tax regime, even though they deserved special treatment in terms of entitlements and privileges owing to their immense contribution to the manufacturing sector.
Unlike VAT (value-added tax), wherein existed no such ambiguities in the entitlements of registered or unregistered dealers, ‘composition’ dealers under GST had much to lose as some irrational provisions of the Central GST (CGST) Act, 2017, worked to their detriment and accentuated their concerns regarding the viability of their businesses.
One such provision barred them from undertaking exports to other states and the other denied them Input Tax Credit (ITC) on their purchases. While the former made them lose a major chunk of their businesses as many had customers outside their home states on whom depended the bulk of their business activity, the latter made them essentially ‘unviable’ as lack of ITC hiked their production inputs beyond sustainable limits.
A technical glitch in one such provision which has remained overlooked so far has resulted in a disconnect between them and regular dealers, who are now registered under the GST but once constituted their rich clientele within their home state during the VAT regime. The glitch pertained to non-availability of ITC on purchases they would make from composition dealers who, since not liable to collect tax on the total value of the supply, didn’t charge tax in their invoices. This required registered dealers to charge the full rate of tax applicable on those items from their customers, in turn, and deposit it also with the tax authorities in full — which they hated doing as it increased their tax liability. To avoid it, they started buying goods from other regular registered dealers only from whom they could avail ITC, sidelining composition dealers in the process.
This inadequacy has incapacitated them from operating even within their home state. Barred from exports, their overall position is pitiable. To them the government’s much-hyped ‘one nation, one market’ concept is hyperbole as there seems no workable mechanism in the legislation which may bridge this disconnect, unless it is amended.
Unviability has predominantly resulted from increased cost inputs on production, rendering their finished products costlier and broadly uncompetitive in the market, more so in contrast to big brands whose prices remained more or less the same as they existed before GST since the mandatory excise duty cut, as provided under the CGST Act, helped neutralise the hike that the high rates of GST would have effected in them otherwise. For instance, levy of 12 per cent GST on their products almost got nullified with 12 per cent cut in excise duty.
On the contrary, lack of a similar neutralisation effect in the wake of their products being ‘excise-exempted’ in the first place escalated prices for small manufacturers exponentially. ‘Low price advantage’, which used to be their USP under VAT, worked greatly in their favour, gave them the edge over competition, fetched them more business and compensated them to a great extent for their ‘not on a par’ product quality in contrast to what MNCs had. This entity is missing under the GST regime.
Two main factors increased their production costs substantially. First, the mischief played by raw material suppliers. The excise duty cut was basically meant to bring down MRP on goods to provide much-needed relief to consumers reeling under inflation. Initially, many did comply and kept their basic prices unaltered for fear that the government would tighten the noose, but in the wake of no checks and balances by it, they started taking liberties. Today, many have their basic prices at a level which is somewhat on a par with what it used to be after adding excise duty during the VAT regime. It means if 12 per cent excise was leviable on their items at that time, their business margins today stand risen by an equivalent proportion under the GST. The result: neither raw material costs to manufacturers have come down nor the MRP for consumers. The irony is that since the prerogative of deciding basic prices lies within the ambit of businesses, such trade practices could be termed only ‘unfair’and not necessarily ‘illegal’ as long as they are not levying excise on them.
Second, under VAT, raw material could be imported after paying a meagre 2 per cent CST on invoiced goods against Form C, but it now attracts a levy of 18 per cent IGST on basic prices. Additional 16 per cent tax so paid, coupled with increased freight on transportation, hikes production costs.
Despite being a priority area identified under the National Horticulture Mission (NHM), the fruit processing sector, especially in the hill states of Jammu and Kashmir, Himachal Pradesh and Uttarakhand, where horticulture and ancillary units processing local produce contribute significantly to state economies, has been relegated to the status of any other regular industry. By placing fruit processed products under the 12 per cent tax slab, which used to be 5 per cent under VAT, the new tax regime has dealt a heavy blow to their viability. What is more unfortunate is the lack of cognitive response from respective state governments, which have neither come forward to own them up in their hour of crisis nor lodged any formal protest in this regard on their behalf at the GST Council meetings.
At the 28th GST Council meeting, the government incentivised registered and unregistered composition dealers in hill states by increasing their turnover limits from Rs 1 crore to Rs 1.5 crore and from Rs 10 lakh to Rs 20 lakh, respectively. It could be a big encouragement to trading houses, not manufacturers, as without having to ensure their ‘viability’ first — which is indispensable for their survival — any talk on the ‘business scale’ hardly makes sense. It is time the government removed such inadequacies in the CGST Act and gave MSMEs a new lease of life.
Himachal Pradesh-based entrepreneur
Industrial enterprises in a nutshell
In accordance with MSME Development Act-2006, the Micro, Small and Medium Enterprises (MSMEs) have two broad categories
Manufacturing Enterprises: Enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule of the Industries (Development and Regulation) Act, 1951, or employing plant and machinery in the process of value addition to the final product having a distinct name or character or use. The manufacturing enterprises are defined in terms of investment in plant and machinery.
Service Enterprises: The enterprises engaged in providing or rendering of services; defined in terms of investment in equipment.