In the past 24 years, Wazir Damani has built a considerable name for himself as a leather goods trader in Dharavi, Mumbai’s best-known slum. He has three retail shops selling bags, wallets, shoes and belts, and a fairly successful wholesale business that thrives on exports and corporate gifting of leather accessories.
But with the new Goods and Services Tax regime kicking in on July 1, Damani no longer knows how his business will stay afloat. Under GST, leather goods will be classified as luxury items to be taxed at 28% – more than double the 13.5% tax levied on leather products so far.
The central government is introducing GST with the aim of bringing in drastic tax reforms, by combining a range of existing indirect taxes under a single countrywide tax. Goods and services have been classified under different tax brackets of 5%, 12%, 18% and 28%, and GST will be levied at every stage of the production process.
For Damani and around 4,000 other leather goods manufacturers and traders in Dharavi, being taxed at 28% will deal a severe blow to businesses that are still reeling from the adverse impact of demonetisation in November 2016.
“This is going to be make survival very difficult for all of us with small and medium leather businesses in Dharavi,” said Damani. “We barely keep a 10% or 20% profit margin for ourselves, so on what basis is the government taking 28% from us?”
‘Corporate clients will move away’
Last month, the Leather Goods Manufacturers’ Association, which represents more than 500 leather traders in Dharavi, had appealed to the central government to reconsider the 28% tax bracket for products made of leather and related materials such as rexine. But with no response in sight, traders are expecting to see a drastic fall in sales in the coming months.
“A handbag that used to cost Rs 1,000 will now have to be priced at Rs 1,280 at least, if not a bit more,” said Damani, who is afraid of losing his long list of corporate clients. “Purses, shoes and wallets are things that people buy with a specific budget in mind. If they become so expensive, companies will just start gifting their employees and clients something totally different.”
With no clarity about how much raw and processed leather will be taxed under GST, and complete uncertainty about how they will manage accounts and file online tax returns 37 times a year, traders acknowledge that they will understand the real impact of GST only later in the year.
“But dhandha [business] has anyway dropped by 50% ever since demonetisation hit us, because there is still not as much money circulating in the market,” said Sayed Alim, the owner of Image Leather Goods in Dharavi. Before demonetisation, says Alim, Dharavi’s small-scale leather industry was already struggling with competition from online retailers, who tend to source their goods from large-scale manufacturers. “Now our goods are going to get more expensive at a time when people don’t have as much purchasing power as before, so we are worried.”
With beef ban, a triple whammy
For the leather industry, however, demonetisation and 28% GST are not the only causes of worry. Combined with the Uttar Pradesh government’s crackdown on meat slaughterhouses in March, the rise in cow protection vigilantism and the recent nationwide ban on the sale of cattle for slaughter at livestock markets, leather traders are dealing with an unexpected triple whammy.
Dharavi’s leather traders source their hide from tanneries in India’s biggest leather tanning hubs in Kanpur, Chennai and Kolkata. “But all this beef ban and slaughter ban has brought down cattle supply and forced many small tanneries, particularly in Kanpur, to shut down,” said Ashok Jaiswal from Gupta Belts, a wholesale shop for belts and wallets in Dharavi. “For now the impact has not reached us because we still have old stock, but what will happen when we run out? We are going to see a major shortage of leather supply, and things will get even more expensive.”
Eknath Mane, who sells processed leather to manufacturers through his shop Heera Enterprises, believes it is too soon to gauge the impact of cattle slaughter restrictions on the leather industry, combined with the impact of GST.
“I used to pay 5% VAT to buy raw leather from tanneries, and as of now, even my chartered accountant is not sure whether I will be levied 5% or 12% tax under GST,” said Mane. What he is worried about, however, is the domino effect the 28% tax on finished products will have on the entire supply-chain of the industry. “If leather product sales drop, leather suppliers like me will have to downsize and then what happens to all the daily wage workers and craftsmen we hire? This is going to cause a lot of unemployment.”
‘Big companies are like camels, they will survive’
Despite these concerns, some leather traders in Dharavi are choosing to welcome GST with a degree of optimism.
“We are going to face a downturn for a while but overall, GST is good for the country, it will help India shine,” said Amaresh Pol, the owner of Asha Leather Arts, a retail outlet in Dharavi. “They say GST will flush out black goods from the market, and the government won’t have to go begging for tax. This means the poor will benefit, and the poverty gap in our country will reduce.”
Mane, however, rubbishes these beliefs. Tax reforms like GST, he believes, will choke small-scale industries and traders while having little impact on large manufacturing companies.
“The big companies are like camels – they have enough stored resources to help them carry on during hard times,” said Mane. “Small industries will disappear, because we have little to fall back on.”