As negotiations between the Centre and states for a single indirect-tax system, called the goods and service tax (GST), stretched to enter their seventh year, Manjeet Singh decided he could not wait any longer. Three months ago, Singh relocated his 60 lakh inverter-manufacturing unit from Haryana to Delhi. In a scenario of multiple taxes, for Singh’s small enterprise, that 25 km inter-state shift, from Murthal in Sonipat to Vishnu Garden in Delhi, was the difference between staying in business and going out of it.
Singh’s economics were being wrecked by a state boundary, and the taxes that flowed from it. He was sourcing his raw materials from Delhi and his clients too were mostly in Delhi. When he moved raw materials from Delhi to Haryana, he had to pay 2% central sales tax (CST) on it. When he moved the finished inverter back into Delhi, he had to pay another 2% CST on it.
Compared to a rival located in Delhi, just a few km away, his costs were 4% higher. Plus, the current system, with its multiple taxes, was loaded against millions of micro and small enterprises in India – with an annual turnover of less than 1.5 crore – like his.
Most of them don’t register themselves with the tax authorities to avoid paying tax or expending effort on paying taxes, but also become ineligible to claim tax set-offs. And the wait for a tax system like the GST, which equalises imbalances and reduces the significance of taxation in a business decision, is hurting them. “The GST barrier was one of the reasons for relocating, to avoid the taxation problem,” says Singh.
He is not the only one. In Murthal, which is a hub for cycle parts, iron fabrication and food processing, Alankar Cables, a 30 lakh maker of electrical cables, and Murthal Thread Company, a 30 lakh supplier of threads used in electrical coil, also have relocated to Delhi, citing similar reasons. “Our business is boxed inside the state, limiting our expansion,” adds Chakit Swarup, vice-chairman of the Ghaziabad chapter of the Indian Industries Association, a grouping of small enterprises.
Even as small businesses are forced to make sub-optimal decisions, indications are the GST, whose original rollout deadline was April 1, 2010, may not even happen in the tenure of the current UPA government. The last meeting of the empowered committee of state finance ministers, the grouping of state representatives that is thrashing out the GST with the Centre, was held on May 10-12.
The main point of concern for the states is compensation for the perceived loss of revenues because of the subsuming of several state taxes into the GST. In April, picking up from the statement of Sushil Kumar Modi, chairman of the grouping, that the Centre and states agreed on 80% of the issues, finance minister P Chidambaram indicated a 70% chance of the passage of GST during this government’s tenure.
“Many issues have to be resolved at the political level,” Modi told ET in April. “The prime minister or finance minister will have to take the initiative. It all depends on the Centre. We are moving in a positive direction, but this being election year, one cannot say anything.”
Small entrepreneurs like Singh bear the brunt of these delays. At present, typically, they have to deal with four taxes. One, the central sales tax (CST), levied by states; two, the central excise tax, of 4% to 16%, when an MSME crosses annual revenues of 1.5 crore; three, a service tax of 12.36% and four, sales tax or value-added tax, of 10% to 20%, on the final good. If the GST was to be implemented, these would be replaced by a single tax.
At present, micro, small and medium enterprises (MSMEs) take a beating on almost all. “Most MSMEs are not registered in the service tax department and central excise tax department,” says Rajeev Chawla, President, I am SME of India, an association that does advocacy for MSMEs. “Hence, these taxes being paid by them are non-refundable. Likewise, for the CST and VAT.”
According to a 2010 Prime Minister’s Task Force Report on SMEs and MSMEs, about 94% of MSMEs are unregistered. The same report says that this sector accounts for 8% of the country’s GDP, 45% of its manufactured output, 40% of exports, and the 26 million enterprises employ about 60 million.
According to LM Ghanshani, member of the Bombay Industries Association, SMEs choose not to register because it is painful to maintain so many tax records. “Today, MSMEs can’t afford the administrative cost because it is complex and difficult for a unit owner to handle the finances of his or her firm.”