It has been ten months since the master plan was announced to annihilate India’s black money stashes of Rs 500 and Rs 1,000 notes. These notes accounted for 86% of the total currency in circulation on November 8, when Prime Minister Narendra Modi put his note ban plan into action.
For my branded apparel business, which runs around 140 retail outlets in 31 cities in India, it has been a period of ups and downs. Until February, there was paucity of cash everywhere. I cursed the lines at ATMs and the arbitrary withdrawal limits. As I wrote in Scroll.in a month after the decision, sales in our stores crashed by 35%. But consumers moved to digital rapidly. In our business, the share of credit card and digital payments jumped to 85% compared to 58% before demonetisation. Over the past few weeks, though, that figure has now settled back at 65%.
I surmised that this move to digital would accelerate credit card usage and hence higher transaction values. However, but the growth has come almost entirely from debit cards – which is to say, cards that people also use to withdraw cash from ATMs. Around our stores, many small establishments that welcomed PayTM, the e-wallet service, have recently stopped this service, reverting to cash.
The limited availability of cash was not entirely without benefits. We eliminated cash payments completely, especially to small vendors who had refused to provide bills and to suppliers of lace and embroidery, which are raw material in our business. At a personal level, our domestic workers and driver switched to cheque payments too. We started electronic transfers for payments.
Though our payment and receipt cycles faced delays, this normalised around June. But then, in July, the Goods and Services Tax was introduced to subsume all taxes, duties and cesses. The GST slabs for the apparel business are reasonable and, with the removal of excise completely, our overall tax liability doesn’t change much from earlier. Despite this, the implementation of GST has been fraught with many challenges. Between January and June, our store-to-store sales had risen 14% over the previous year. In July, they dropped by 2% from the same month last year.
Businesses like mine earn a profit equal to or slightly more than the indirect taxes that we pay to the state. This makes every tax credit applicable to us in the GST framework very valuable. But the process of accounting and claiming credits was initially complicated, causing stress on our accounting systems. We work with separate consultants for excise, value added tax and income tax. All our three consultants claimed expertise in GST, even as they were still learning the ropes.
The next challenge that came up was the ERP software upgrade to account for GST. Enterprise Resource Planning information systems link all the functions of a business, such as purchasing and sales, and help maintain financial and business discipline. But ERP service providers were not geared up to account for the new rules. We needed many bespoke changes that continue after two months of GST.
Besides, the rules aren’t clear. To receive credits in our liabilities, there are invoices to be matched and compliances to be maintained. I believe that most of our GST challenges will eventually smoothen out, with the exception of invoice matching. Invoice matching is a mechanism under which all taxable supplies made under GST will be matched against all taxable supplies received by the buyer. India is the only country, to my knowledge, which mandates this. But perfect execution is near impossible.
On a positive note, it is now very difficult for businesses to fly under the radar of the tax authorities. If collections improve, then perhaps every honest tax payer will also benefit from lower tax rates in future. Our trucks and products have been crossing the state borders seamlessly with minimal paperwork since octroi and state-level taxes have been abolished, but more new amendments are expected that may extinguish the euphoria.
Winners and losers
The period post-demonetisation has been dominated by Reliance’s foray into telecom, the rise of PayTM and a slowdown in the growth of the internet retailers. Obviously every downside has an opportunity. Successive governments continue to see monopolistic enterprises as being the drivers of growth. Small and medium-sized businesses that are tax compliant and growing organically are ignored, resulting in the danger of stagnation and of falling prey to larger ones.
Meanwhile, the discourse on the benefits or drawbacks of demonetisation has assumed epic proportions. An enormous decision was taken, before a crucial state election, ostensibly to check black money and to bring more tax payers into the net. There is no dishonour in accepting that it has failed to achieved the intended effects. The fear this has caused will probably ensure compliance in the future.
But let’s stop deluding ourselves and pretend that demonetisation was a lofty, moral decision, belittling all logic and data that prove the ineffectiveness of this move. The country and its people have paid a bruising price.