Apart from the public and informal business sector's resentment about the Goods & Services Tax (GST) that came into effect on 1 July after being in the making for nearly ten years, the new tax regime has created a gulf between those who gained from it by fast adapting to it and those who could not, the latter mostly belonging to the informal and small-time sector, as per a survey by Bloomberg. The ones without the technical or manpower resources required to implement the new system could not cope with either the cumbersome software requirements or the procedural complications.
The critical part is that the country's small business sector constitute nearly half of the economy, sufficient to cause the lull in activity and cash flow issues felt by a large section of the population thereby causing a dent in the popularity of the current federal government of Narendra Modi.
India's bigger companies like Tata Group's Titan Co Ltd, the country's largest car maker Maruti Suzuki and Godrej Consumer Products, according to Bloomberg, in fact even capitalized on the disruptions to be one-up and reap gains. On the other hand, smaller players said to number around 58 million, reported falling profits and even having to effect job cuts as a fallout of the increased compliance costs, supply-chain disruptions and policy changes. And such companies had to run earth and heaven in the chaotic roll-out of the new GST regime with its multi-tier structure and cumbersome reporting system. The situation was so chaotic with changes in notifications coming in the dozen, that the very software had to be tweaked overnight several times throwing most enterprises off-gear often.
No wonder, in response to the near panicky situation, the federal government recently had to take steps to slash tax rates for nearly 200 items and ease filing norms. The move also recognizes the necessity to regain India's competitive edge and for the growth of Asia's third largest economy. But experts feel that the recovery from the 'GST blues' will take long. “This led to some of them putting all operations on hold and it will now take some time for them to revive their business. Many smaller companies are suppliers to large businesses and they were worried about business continuance and tax challenges.” Bloomberg quotes MS Mani, a partner overseeing GST at Deloitte India.
It is not the intent of the new reforms that has become the subject of debate. Most observers agree that it will create an environment where tax-evasion will become difficult, and more regulated business practices will be ushered in. But the sloppy - and hasty - roll-out without sufficient mechanisms in place to implement it, caught the majority of the trading sector off-guard – and they missed the bus to the stronger players to be excluded from an otherwise possible buoyant economy. Thus the promise of Modi to have a more 'inclusive' growth stood belied.
Citigroup Inc analysts Jamshed Dadabhoy, Aditya Mathur and Arvind Sharma travelled through the state of Madhya Pradesh in October to meet local companies, wholesalers and traders. In most conversations, owners indicated increased compliance costs and difficulties with the technology and network to upload tax invoices. On the other hand, Nisaba Godrej, executive chairwoman of Godrej Consumer Products Ltd, said remaining “agile” helped her 120-year-old soap company navigate channel disruptions and deliver 10% volume growth.
As another example, Bloomberg cites the case of the gold and jewellery industry where organized retail has overcome sales volume declines. Titan for example reported a 71% rise in 2nd quarter net profit from a year earlier and 29% increase in sales. But even in sectors where some companies gained in terms of market share, overall acceleration in demand looked yet to be achieved. Businesses were shy to replenish inventories after they were emptied out pre-GST due to the uncertainty about it implications, recalled Anil Raj Gupta, the chief of Havells, India's largest electrical equipment maker.
Credit Suisse analysts, Neelkanth Mishra and Prateek Singh, quoted by Bloomberg, cited surveys by Tally Solutions Pvt. Ltd, a software provider, to highlight the pain of many small enterprises. The surveys indicate businesses are holding back payments to their suppliers till they are convinced the supplier has paid the tax and uploaded the invoice.
“This is because they are unsure they will get any credit,” they wrote in a report. “If this is systemic and not just a few anecdotes, it could slow down activity levels in many supply chains for several months.”