Five years of GST: Some biz adapted, some perished, as others thrived

This report from Howrah talks about how the mid-sized and smaller players lost ground

Till 2017 when GST was introduced, Abhishek Iron Foundry in Howrah, West Bengal, had a rainbow of customers, from small and medium to large but, post-July 1, many of the shades started to fade.

The biggest casualty of India’s widest reform in indirect tax, GST, were those operating in the twilight zone of the formal sector. Abhishek saw its small buyers’ segment that accounted for about 30 per cent of its business, quickly disappear.

The result: the foundry’s business dwindled and its contractual employee base has shrunk by about 70 per cent (Howrah’s foundry units mostly operate with contractual workers).  

“The smaller buyers who operated on wafer thin margins and hardly had any working capital went out of business. They were just about making ends meet before GST,” said Amalesh Dutta, managing director, Abhishek Foundry.

He explained that when GST came into force, small buyers were buying material from him and paying 18 per cent GST. Their cost of material increased.

“But at a higher price they were unable to sell the product in local markets where a section of participants continued to evade GST and were selling the same material at a lower price,” said Dutta.

The initial phase of GST implementation in Howrah (home to about 95 per cent of the foundry and forging units in West Bengal) was a period of uncertainty.

“Many units laid off people and units worked with lower capacity or shuttered down for some time,” recalls Santosh Upadhyay, secretary general, Howrah Chamber of Commerce and Industry. “But they reopened.”

The pain was not confined to the manufacturing units in Howrah. GST, with its myriad challenges from compliance to higher overhead costs and working capital, challenged traders and retailers alike.

In Burrabazar, one of the largest wholesale markets in Asia about 14 km from Howrah across the river Hooghly, business took a hit when GST was implemented.

“The small retailers in villages were impacted when GST came into effect and that impacted us. Not everyone can afford to employ chartered accountants. Business dropped sharply then,” said Niraj Agarwal of Shree Shiv Oil & Pulses, one of the bigger wholesalers in Posta Bazar.

The threshold limit for GST registration is Rs 40 lakh for goods and Rs 20 lakh for services. Now, the worry is that with inflation surging, many more retailers will come under the ambit of GST, said Biswanath Agarwala, general secretary, Posta Bazar Merchants’ Association.

Posta Bazar is a sub-mart for perishable commodities in Burrabazar. About 200 trucks move daily from here supplying a range of products from edible oil, salt, cereals and spices and food grains to roughly 30 per cent of West Bengal.

In the last five years, as in any business order, the bigger players have rearranged themselves. But the mid-sized and smaller players continue to grapple with challenges on several counts, ceding space to larger players in the business.

Size matters

MSMEs lost business to large players post-GST, since the cost of compliance increased and not all entities possessed the technical expertise to deal with the online system, points out Pushan Sharma, director, CRISIL Research.

“Most required intermediaries leading to higher burden of compliance and associated costs,” said Sharma. M S Mani, partner, Deloitte India, said that most of the earlier problems have been resolved over time but ‘the compliance framework in GST is fairly intense’.

It’s not just large versus MSMEs, though. Even among MSMEs (that include micro units), not all are on an equal footing. The pain and disruption are not so apparent among the bigger units.  

For instance, if the larger wholesalers lost out on smaller customers in the villages, then inter-state sales made up for it. “The biggest positive of GST is that we can now sell our goods even outside the state, wherever we can get a better price. Earlier, there was too much paperwork,” said Agarwal of Shiv Oil.

Among foundries, the bigger units are happy with the input tax credit under the GST regime. “Under VAT, we could claim credit only for inputs used in manufacture. But under GST, credit can be claimed for goods and services. So if I am engaging a consultant or paying truck freight and GST is charged on it, I can claim credit,” explained Dinesh Seksaria, managing director, Govind Steel.

His foundry in Rishra, Hooghly, is one of the larger ones for grey iron castings and ductile castings in India. The challenges are at the other end of MSME spectrum: the unorganised players. But the positive, experts point out, is that many of them have become part of the formal sector.