NEW DELHI: 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 fromHaryana to Delhi. In a scenario of multiple taxes, for Singh's small enterprise, that 25 km inter-state shift, from Murthal in Sonipat toVishnu 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," addsChakit 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 centralsales tax (CST), levied by states; two, the central excise tax, of 4% to 16%, when anMSME 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."
Even when they are registered, MSMEs face other kind of hurdles. "The biggest problem that the MSMEs are facing today is the 'C' form refund," says Ajay Modi, vice-president of the Confederation of Indian Industries, an association of MSMEs. This is the refund due on account of taxes paid for which they are eligible for setoffs. "Their C form refund is pending with the respective state governments for around two to three years," says Ajay Modi, adding that the amount from Maharashtra alone would be around 10,000 crore.
According to Amrendra Sinha, additional secretary and development commissioner, ministry of MSME, GST is a win-win. "It would increase compliance among small enterprises, besides also reducing input cost and cultivating financial discipline among MSMEs, leading to an increase in revenue collection." Adds Vijay Setia, former president of the All India Rice Exporters Association: "GST would smoothen the tax system and businessmen evading taxes would come forward to pay taxes on time."
MSMEs, today, are reluctant to register themselves because of the pains of compliance. For example, a unit is exempt for paying central excise tax if its annual revenues are below 1.5 crore. "Today, MSMEs are frightened by the central excise department," says Swarup of theIndian Industries Association. "Therefore, whenever a MSME reaches 1.5 crore, it splits the firm."
But, in doing so, MSMEs place barriers to their own growth. For example, by intentionally staying small, they are able to borrow less. "Today, MSMEs complain about the low line of credit or the high rate of interest," says Premsagar Vij, President of the Panipat Exporters Association.