Re­verse charge squeezes out small firms


The new in­di­rect tax regime is hav­ing an ef­fect akin to set­ting a cat among pi­geons for mi­cro and small busi­nesses across the coun­try. This is largely due to a pro­vi­sion for col­lect­ing and pay­ing tax on be­half of un­reg­is­tered ven­dors and sup­pli­ers, un­der what is termed the re­verse charge mech­a­nism (RCM).

A con­cept bor­rowed from the ser­vice tax, the RCM also now ap­plies to sup­ply of goods. How­ever, higher com­pli­ance cost, in­clud­ing a larger work­ing cap­i­tal re­quire­ment, is caus­ing a shake-out in the pro­cure­ment chain of busi­nesses. The smaller ones, op­er­at­ing largely in the un­or­gan­ised space, are los­ing. Con­sider: Large com­pa­nies in the fast-mov­ing con­sumer goods (FMCG) space have started prun­ing their ven­dor list for sourc­ing prod­ucts and ser­vices, weed­ing out small sup­pli­ers which are yet to regis­ter un­der the goods and ser­vices tax (GST). The re­main­ing ones — barely 10 per cent of their ven­dor uni­verse — have been put on no­tice;

In the tex­tile hub of Tirupur in Tamil Nadu, many com­pa­nies are dis­cour­ag­ing supplies from house­hold units, man­aged by fam­ily mem­bers on a part-time ba­sis;

Larger tex­tile and leather-mak­ing units in Tamil Nadu are look­ing at start­ing of job work ac­tiv­i­ties in-house, as against the usual prac­tice of out­sourc­ing these to mi­cro and small units. The trig­ger is the 18 per cent tax on job work that larger units will now have to bear un­der the RCM when they source from these units.

Tex­tile & leather clus­ters In Tirupur, roll-out of the new in­di­rect tax regime over the past two weeks has re­sulted in trans­ac­tions com­ing down by 25-30 per cent. The im­pact is more visible on the large num­ber of house­hold units.

Around 25 per cent of units in Tirupur or 50,000-odd house­holds work as sup­pli­ers for large com­pa­nies, says Raja M Shan­mugham, president of the Tirupur Ex­porters’ As­so­ci­a­tion (TEA). Reg­is­ter­ing un­der the GST would also be tough for many of these mi­cro units, as they might not have all the doc­u­ments or where­withal to complete the pro­ce­dure, say lo­cal en­ti­ties.

So, many large com­pa­nies which have been giv­ing job work to these units are look­ing at set­ting up their own units for such ac­tiv­ity. Shan­mugham says job work at­tracts 18 per cent GST, com­pared to the five per cent tax for pro­cesses up to com­pact­ing. “Ac­tiv­i­ties like em­broi­dery and stitch­ing are in the 18 per cent slab, a great anom­aly,” he says. The TEA has re­quested the cen­tral gov­ern­ment to look into this is­sue. The sup­pli­ers who source from un­reg­is­tered small units note that they also have to foot the tax upfront. Whereas, they will get the money from the buyer only af­ter three to four months.

The owner of one large unit says he has taken a list of his sup­pli­ers and asked all those not reg­is­tered un­der GST to get this done or face the risk of their con­tracts get­ting can­celled. Cur­rently, 90 per cent of large- and medium-sized units in Tirupur have com­plied with the GST reg­is­tra­tion re­quire­ments.

The sit­u­a­tion is sim­i­lar for small units in the leather in­dus­try. In Vel­lore district in Tamil Nadu alone, there are around 200 such units, fo­cus­ing on job work for the footwear in­dus­try. Faced with heat from sup­pli­ers to get GST-reg­is­tered, most of these say they might find it dif­fi­cult to sus­tain over a pe­riod of three to four months. Many of the mi­cro units have a single owner-cum-em­ployee and are not able to fully com­pre­hend the tax fil­ing mech­a­nism. Chem­i­cal clus­ters In the chem­i­cal clus­ters of Gu­jarat, in and around Ahmed­abad, Vado­dara and Su­rat, most of the en­ti­ties have al­ready mi­grated to or­gan­ised pro­cure­ment. Ru­pen Pa­tel, pro­pri­etor of a small-scale tex­tile unit in the walled city area of Ahmed­abad, says RCM was a big de­ter­rent for his unit to con­tinue pro­cure­ment of chem­i­cals for pro­cess­ing from the un­or­gan­ised play­ers.

He be­gan ne­go­ti­a­tions in June for pro­cure­ment for pro­cess­ing from or­gan­ised en­ti­ties. “We had to stall our pro­cure­ment and pro­duc­tion for at least a fort­night be­fore we made the tran­si­tion,” says Pa­tel. This has, of course, had an im­pact on the mar­gins, due to rene­go­ti­a­tions with new sup­pli­ers. Even so, it was im­por­tant for avail­ing of in­put tax cred­its, he says.

Most small chem­i­cal units in Vado­dara are aware of the com­pos­ite levy scheme un­der the GST. “We are a very small unit, with lim­ited man­power. It is tak­ing us some time to set things in or­der,” says the owner of one of these. He plans to opt for the scheme by the end of the month. FMCG Most large fast-mov­ing con­sumer goods (FMCG) com­pa­nies have sent out cir­cu­lars on a strict note to their ven­dor part­ners, to get GST-reg­is­tered. So, the is­sue of deal­ing with un­reg­is­tered ven­dors is lower here. Con­ver­sa­tions with mul­ti­ple com­pa­nies and stake­hold­ers re­veal the larger play­ers have been able to prune their ven­dor uni­verse, dras­ti­cally bring­ing down their de­pen­dence on un­reg­is­tered ones.

“The prob­lem for us comes with those peo­ple who are out­side our ven­dor sys­tem,” says Su­nil Kataria, busi­ness head, In­dia and Saarc, at Go­drej Con­sumer. He is re­fer­ring to the whole­sale chan­nel that re­mains largely un­or­gan­ised, ac­count­ing for 35-40 per cent of an FMCG com­pany’s sales. Com­pa­nies are now work­ing with these through their dis­trib­u­tors, to con­vince them on switch­ing to a GST regime.

At a broader level, says Su­mit Mal­ho­tra, man­ag­ing di­rec­tor, Ba­jaj Corp, com­pa­nies are also try­ing to re­duce their de­pen­dence on the whole­sale chan­nel, push­ing their own dis­trib­u­tors to reach re­tail­ers di­rectly.

“De­mon­eti­sa­tion was a wake-up call for com­pa­nies to re­duce their de­pen­dence on whole­sale, since this chan­nel tends to be cash-led,” says Mal­ho­tra. “This ef­fort will now gather steam af­ter the GST.”

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