On July 1, the central government launched the Goods and Services Tax, which replaced all taxes on the manufacture, sale and consumption of goods and services across the country. Billed as the biggest tax reform ever, GST was aimed at making India a unified market, bringing down trade barriers and simplifying doing business across states. But three months later, businesses are struggling to cope with the change. This series explores the problems they are facing, with the focus on small businesses, which seem to be hit the worst.

On September 22, Ashok Shah spent most of his afternoon staring in disbelief and growing frustration at a text message on his phone. It was from the Maharashtra government’s sales tax department, informing him that his company’s Goods and Services Tax number had been cancelled.

“That’s it, there is no explanation given,” said Shah, owner of Samrat Compuprint, a small manufacturer of paper stationery in Mumbai. “Now I will have to drop my work to go find out why I have been kicked out of GST, and get a new number so I can run my business.”

Samrat Compuprint is among the dozens of small-scale printers, binders, envelope makers and paper industry workshops tucked away in the back lanes of South Mumbai’s Fort area. When the central government rolled out GST on July 1, subsuming all indirect taxes on goods and services into one countrywide tax, like all other businesses in India, the paper industry units had to register on the online GST Network. Only businesses trading within a state and earning less than Rs 20 lakh a month are exempt from GST.

Shah and other businessmen in the paper industry said they not only faced difficulties registering on the GST Network and filing returns three times a month as required, their working capital was also stuck in the system. As a result, three months later, the industry is witnessing a slowdown and everybody is worried about the future.

Problem 1: Mismatched invoices

For businesses like Samrat Compuprint, which supply stationery in bulk to large companies, the biggest roadblock to filing monthly GST returns is submitting invoices that match the bills exchanged with the clients, and submitting them on time.

“I may make a bill and submit it to my client when I deliver his stationery, but if the client takes a few weeks to check and approve the bill, how am I supposed to file my invoice?” Shah asked. “And if I submit the invoice on time, the GST website does not even give me the option to make corrections later.”

Shah then explained his predicament with a more specific example. His company specialises in manufacturing “continuous stationery”, reams of folded paper used in billing machines to print tickets and receipts. To cut and print continuous stationery for a particular client, he buys large quantities of raw paper from a wholesale vendor. The price of the paper varies with thickness and quality but on an average he pays Rs 9 lakh for 16-20 tonnes of paper – a batch that could last for two to six months. Before July 1, Shah paid 6% Value Added Tax and 6% excise duty on raw paper, so the 12% GST that has replaced those two taxes does not bother him.

The trouble, he said, begins after the continuous paper is printed, packed and transported to the client, along with the bill for the amount due for the stationery and GST of 18%. “Often, while transporting the goods, a box gets damaged in rain or in some other way,” said Shah, whose goods usually lie in the storehouses of big companies for weeks before they are opened, inspected and put to use. “By the time the client finds out about the damaged box and deducts the amount from the bill, I have already been forced to file my GST returns for that month.”

Ashok Shah in his stationery shop in Fort, Mumbai. Photo credit: Aarefa Johari

This is how many other businesses in the area end up submitting mismatched invoices. “Such an incident happened with me just last month, and maybe that is why the government has cancelled my GST number,” said Shah, who claims the general perception within his industry is that the government sees all small businesses as thieves. “Humko woh chor hi samajhte hai,” he said. “But this harassment needs to stop. Everyone is not trying to evade taxes. Human errors and other problems keep happening.”

Problem 2: Cash shortage

When GST returns are successfully filed on time, small paper enterprises struggle with a shortage of cash. “It has always been the case with some clients to delay payments to us by a couple of months, but before GST, we didn’t have monthly liabilities,” said Urvesh Kapasi, manager of Deep Impac, a 50-year-old printing and binding business in Fort.

Deep Impac has an order to make up to two lakh thin cardboard files every month for a large private bank. The company won the six-month contract after a competitive bid, and has hired two daily wage labourers – for Rs 350 per eight-hour shift – to cut and print the files and put in metal clips.

“When the client delays payment, we cannot pressurise them to pay up because they will just give their next contract to another bidder,” said Kapasi. “But we also have to file GST returns for that month, and pay our labourers in cash. We don’t have much cash to depend on, especially because the government has not yet started the process of refunding GST returns it owes us.”

In the GST regime, tax is not levied at the end of the production process but at every step along the chain. Every company in the value chain has to pay tax on only the value it adds. The surplus tax it pays while purchasing raw material, or inputs, can be claimed as a refund, which is called input credit. Businesses, though, are still waiting for their refunds.

Workers at Deep Impac fasten metal clips to cardboard files. Photo credit: Aarefa Johari

Problem 3: Code confusion

Kapasi, Shah and many others in the paper products industry feel strongly about the refunds under GST, no least because of the confusion over which Harmonised System Nomenclature code to apply to which product. HSN, as it’s commonly known, is an internationally adopted coding system for classifying different kinds of goods.

In Kapasi’s case, he is aware that printed pamphlets are taxed at 5%, letterheads at 12%, files at 18% and hardbound registers at 28%. Not all paper businesses, however, have that clarity.

In another corner of Fort, a small manufacturer of high-end designer stationery claimed to be charging extra GST from customers just to be on the safe side because no one is certain about the amount to be applied.

“We pay 12% GST on the plain paper we purchase, but after we convert it into stationery, we don’t know how much GST to charge,” said a spokesperson for the designer stationery brand, who asked not to be identified. “We can’t find any specific HSN codes for paper bags, empty gift boxes and other such items. Our suppliers, too, are confused about the different types of handmade and mill-made paper, and the different tax rates they are listed under.”

Because of this confusion, many of the company’s paper suppliers are refusing to send it invoices with the complete eight-digit HSN code. They have been making bills with just the first four digits – 4909 – indicating paper products in general. “But the government has made eight-digits compulsory. So how can we submit our invoices?” the spokesperson asked. “For now, we are charging a flat 18% GST from our customers for most products. If the tax was meant to be 12% for those products, hopefully we will have more clarity in a few months and get our refund.”

Biggest problem: Business slowdown

Overall, GST has undeniably harmed the paper products industry of Fort. With cash flow hit, both the businesses and their major clients are erring on the side of caution.

“Our business has shrunk to 30% of what it used to be this year because our clients are placing smaller orders,” Shah complained. “They don’t know what is going to happen with GST in the near future, so they are placing only small orders.”

Shah said he knows of at least a dozen paper manufacturing firms that have been forced shut by the combined burden of demonetisation, announced in November 2016, and GST. “The only reason my company is still afloat is that we have diversified into plastic products,” Shah said. “Not everyone is able to do that, and they are shutting down.”

This is the first part in a series looking at the impact of GST. Read the other parts here.