Why GST is Getting Surat Terrified

Why GST is Getting Surat Terrified

Starting the 27th of June, the MSMEs belonging to the Textile Industry in Surat have been in a state of shock! They quickly tried to figure out what hit them — got scared to no end doing so — took to the streets, processions, dharnas, fasts — even withstood a Lathi Charge — all within a week! GST surely is Getting Surat Terrified!

To understand why this is so, we need to first understand a bit about Surat.

Surat is the polyester capital of India. Whether you shop at retail stores or buy a Saree, Salwar Suit or a Kurti through one of the daily deals on Amazon, chances are that it has a link back to Surat.

Migrants

The Surat textile industry is full of migrants — people from all over the country (other cities, more from small towns and villages) have migrated to the city to serve their native market. Over the years this additional demand resulted in the growth of the entire sector — and a few of these migrant units grew to a large scale. Most, however, stayed small. The barrier to entry was and is zero causing a continuous influx of migrants from all over the country. Anyone from a small village could come

Anyone from a small village could come into Surat, take a small 160sq ft shop on rent (basic reference of someone from his native already settled here) to start his business operation within a day! Ease of doing business was at all time high here!

The Textile Value Chain

Surat has thousands of weavers — (those who convert yarn to fabric). Around 450 process houses (engaged in printing and dying of fabric). Thousands of embroidery units, stitching units and lakhs of people employed in the checking, packing, cutting, transportation — and thousands of agents, arhatias, brokers, commission agents aiding each step.

The key about the Surat value chain is that it lacks Integrated units — not that they don’t exist — but that they are the exception. GST is a boon for the Integrated players and they are not complaining at all! The norm in Surat, however, is for the migrant trader to buy greige from the weaver, send it for processing to a process house, send it to an embroidery unit, then send it to value addition multiple times before the product is ready to be packed and sold to his native market.

It is worth noting that the value chain is a buyer’s market all the way. Oversupply at each step is the norm. (Reason? Zero barriers to entry at the migrant trader level, and it’s these traders who’ve “graduated” to other parts of the value chain — often to escape competition at their previous link).

Given the above, it is easy to see that these migrant traders drive the value chain. They place the orders at the Weaver, the mills process their orders, and so on in other parts of the chain. These migrant traders started with zero or very little “books capital”. The taxation and the attitude towards taxation ensured that even when they made money, their books capital stayed low — and a parallel economy bloomed! The nature of the value addition required (lace stitching, diamond sticking, handwork etc) and the kind of people executing them (often housewives at their homes) meant that there were lots of avenues to deploy the cash capital. The fact that nothing except income tax was applicable effectively meant that book-keeping was an annual exercise — reserved to be driven by the CA!

Competition, however, is another story. The zero barrier to entry meant more and more competition. This created a large section of migrant-traders who stayed small — and cut corners everywhere to survive! Tax evasion was just one example of such “cost-cutting”.

Goods so produced are typically sold via agents in the native market. The buyer downstream is just as disorganized. Returns are high. Often goods are sent to the agent on a consignment basis. Unsold. To be sold — and invoices created after the agent informs who he sold the goods to and at what rate/discount — sometimes as late as 60 days after dispatch! The high competition also means that even a small migrant-trader deals with multiple agents and keeps switching agents even for the same customer!

Enter GST

With the introduction of GST, the entire value chain breaks down — and will need to re-organize in a big way!

Inverted Duty Structure

The weavers buy yarn with 18% GST, sell fabric with 5% GST. This renders them totally uncompetitive against an integrated player who will be able to sell fabric almost at the cost of the yarn used. (100 Yarn + 20 Conversion + 6 GST = 126 for Integrated, 100 + 18 (GST) + 20 + 7(GST) = 145 for weaver). No ITC Cash refund system for the textile sector ensures that he will not be able to benefit from the yarn GST credit lying with him! There are thousands of weavers facing this!

Cheaper Imports

Imports have become cheaper: Post GST, you can import fabric @ 15%. Earlier it was @27–29%. This is another nail for the weaver! Not only has GST rendered him uncompetitive against local integrated players, it has taken away the protection that the government provided via import duty!

The migrant traders owing to his scale buys from the local weavers. His costs are bound to rise rendering him uncompetitive.

Reporting and Compliance

All transactions need to be reported. Purchases need to be reconciled with the supplier on a monthly basis. This will mean that even even the smallest of traders will need to invest in a full time accountant and be far more organized. The issue may appear frivolous. After all, who runs a business and not even invest in keeping books properly? Welcome to Surat! For the large section of small migrant-traders of Surat, this change itself requires a change in mindset and a recurring expense that they would rather not do!

Cash Capital

Transaction-level reporting as mandated by the GST will mean that the booming parallel economy will collapse! Cash Capital that the trader generated over decades can no longer be deployed in his business. The thriving parallel economy was a tool to cut costs will collapse! GST almost forces that you buy from organized players, and this will, in the Surat’s textile sector, mean that the cost of purchase for these migrant-traders will go up! Bank loans will increase — servicing them will be an additional cost for the trader.

Other Operational Issues

The thousands of housewives working from home stitching laces, sticking diamonds could lose their jobs — lest someone amongst them organizes them into a GST compliant outfit. Even when that happens the costs of the chain increases!

Sales in other states via agents — when goods are sent unsold and later sold by the agent, as per the GST Law, requires registration in each state! This means more compliance, more costs!

No Input Tax Credit Refund to the textile sector — effectively meaning that each and every item is now 5% more expensive!

Fear Factor

Provisions of jail term, audits, inspectors — those mentioned in the GST Law have only served to escalate the fear in the minds of the Surti Trader! The trader has till now been exempt from all taxes (except income tax) — 99.9% are not even covered under ESIC, PF or any other such tax/levy/fee. Fear of being harassed at the hands of the inspector in the GST regime drives them to revolt!

In summary, the traders and weavers, the ones who are up in arms — fear being rendered uncompetitive & jobless, they fear being harassed by the inspectors and getting sucked into a bribe culture (which is non-existent currently!) — it is really a question of survival for many and therefore GST is Getting Surat Terrified!

4 Comments

  1. Dhruval

    Well written article. Covering Surat’s landscape and the situation existing. Coming from Surat I can add that the attitude and the feeling of one’s right to not pay tax (income tax, more than the GST) is also leading to the fears.

  2. Mitesh jain

    Perfect analysis sir!

  3. Madhav G Risbood

    Apt description of the fabric trade in Surat.Also high time that it is organised & structured to comply with law of the land.
    However the downside is that the restructuring, even if traders change their mindset, will leave a huge population jobless.
    Secondly Industry, ministry & Govt have to be very nimble & fast to change lpolicies & plug the loopholes, even at the cost of being embarassed & protect the textile industry at all costs.

  4. SHAILENDRA

    I believe this is best for traders , once they are a legal entity for which the cost is not much , a disciplined trader environment will evolve .

    It’s happened in the stock market , more than 2 -3 decades ago , so why not textiles .

    In fact they will now make more money and earn more , as legitimate incomes also puts them into the bracket of procuring bank loans , as government will also provide support for their business from micro finance .

    They can go for online buisness which is huge ..

    I think it’s a benefit , For manufacturers and legitimate suppliers who pay taxes , invest huge sums in their business and are able to supply at a certain cost,while the trade would undercut and sell thus blocking
    The ethical business practice . So it’s good for companies with good governance .

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