For Lokhand Bazar in South Mumbai, a major steel hub, the period between Navratri and Diwali is its busiest time of the year. Iron and steel sales hit their peak and industrial activity, especially construction, picks up after the monsoon. This year, though, the market is quiet. Traders attribute this to the Goods and Services Tax – the indirect tax launched on July 1 that incorporated all Central and state levies businesses were earlier charged – and demonetisation, or the withdrawal of Rs 500 and Rs 1,000 bank notes in November.
“The charm has gone from the market now,” said Jagdish Mehta, a trader dealing in steel cables on Sant Tukaram Road, which runs through Lokhand Bazar. This is not his real name as he did not want to be identified. “There is no fun in this business anymore,” he added.
Mehta ordinarily sells around 10 tonnes of wire every day through the year. In the period after Navratri and before Diwali, he expects to sell 15 tonnes to 20 tonnes a day. But this year, his daily sales have remained at 10 tonnes.
Lokhand Bazar, adjoining Mumbai’s eastern dock area, used to be the city’s steel hub. Its oldest steel traders have offices here, though as the docks declined over the years, several businessmen have shifted to Navi Mumbai and other areas. But even today, most of the offices on Sant Tukaram Road belong to steel traders.
This reporter visited the offices of at least 20 traders over two hours on a Wednesday afternoon. Only two agreed to speak about the impact of the Goods and Services Tax on their business, and only one of them agreed to be identified by his real name.
Getting out of cash
Though the tax on steel remains unchanged at 18%, this reluctance to talk might be because many traders earlier conducted business both above and under the tax radar. Formal transactions, for tax purposes, happened with cheque payments or direct bank transfers. Informal transactions were in cash.
But in the new tax regime, their supplies are tracked from the iron ore manufacturers right up to their warehouses. This gives them less room for informal transactions.
The advantage of cash, apart from the obvious one of tax evasion, was its ease of use, Mehta said.
“Rokde mein hua to on the spot use hoega,” Mehta said. If sales happened in cash, they could transfer the goods and start using the money immediately. Now, with cheque payments, his cash flow has come entirely to a halt, with people delaying cheques or post-dating them.
How much of his business was done in cash earlier?
“I could have done 100% in cash,” Mehta said, laughing. “But earlier, we used to have 40% sales in cash and 60% in bills. Now, of course, it is 100% bills.”
“Hum sab dual game khelte the [we used to play a dual game],” Mehta said, referring to the practice of traders maintaining two account books – one for cash deals and the other for tax purposes. “Now we are only doing single. That is why our profits are now almost nothing. I feel we are doing seva for the government now.”
Another reason Mehta’s cash flow was affected was because, after GST came into operation in July, he had to file tax returns every month as opposed to every quarter earlier.
Mehta stores about 100 tonnes of steel cables in his godown. Like other traders in the area, he sources most of his steel from Raipur in Chhattisgarh. “We can’t keep any less because we can get orders at any time, even in the middle of the night,” he explained.
Since Mehta had to file monthly returns, he ended up paying tax on his goods much sooner than he wanted to. He might buy 50 tonnes of wires in January and pay taxes for it in February, but he might only sell it in October, he explained.
“Our buying is on the spot, but our sales are getting delayed,” Mehta said. “So until then, that 18% tax of mine is stuck with the government.”
As a single tax, the Goods and Services Tax impacts steel traders directly through cash flows and indirectly through their customers, who work in fields as diverse as construction and manufacturing.
Most of Mehta’s customers are builders. And the construction sector is dealing with reduced cash flow not just as a result of the Goods and Services Tax but also because of demonetisation. The situation has been compounded by the Real Estate (Regulation and Development) Act, a Central law that came into effect on May 1, 2016. Among other regulations, this Act mandates that builders have to keep 70% of the money they collect from home buyers in a separate bank account to avoid fraud. They can use 30% of their sales to run their business.
Builders now not only have less cash to push into the steel industry, they also have to pay a higher tax under the Goods and Services Tax – from 12% earlier to 18% now – pushing up their overall working costs.
Mehta is not the only steel trader to suffer the effects of the Goods and Services Tax. Ajit Shah of Arihant Steel Tubes, also in Lokhand Bazar, said business was down almost 50%, but he was not as frank as Mehta.
“We still get business from automobile factories,” Shah said. “But the demand from chemical factories and other small factories has gone down.”
He attributed the slowdown to demonetisation, apart from the new tax.
Since the Goods and Services Tax entails a lot of book-keeping and the filing of frequent tax returns, most businesses have had to hire chartered accountants, who are now charging higher fees. Shah said his accountant used to charge him Rs 2,000 for each return filed, but the fee has now gone up to Rs 5,000. This eats into his profits as well, he said.
Not in a forgiving mood
Mehta said he would prefer to file returns every quarter or six months. “We have to take two days out every month just for this [filing returns],” he complained. “It is as if we are working for the government, and not for ourselves.”
In the face of similar complaints from across the country, the Goods and Services Tax Council – which frames laws for the new tax regime – on Friday said that businesses with a turnover of up to Rs 1.5 crore can now file returns quarterly instead of monthly. But many small business owners say this will make compliance easier but is unlikely to address the problem of working capital shortage.
Mehta did admit his experience with the Goods and Services Tax had become progressively better since the initial days. He said he had earlier had to wait for days on end for the Goods and Services Tax portal to accept his returns, but the process was substantially smoother in October. He also believes the problems businesses are facing in the new tax regime are short term and will ease if the government reduces the rate on steel products.
But this does not mean he is in a forgiving mood. Mehta used to be an ardent supporter of the Bharatiya Janata Party and voted for Narendra Modi, who was the party’s prime ministerial candidate, in the 2014 general elections. He has now decided to vote for the Congress in the coming elections in 2019.
“Our support is the reason the BJP came to power and now many of us have decided to withdraw our support,” Mehta said. “We don’t mind if they do anything else, but they should not touch our business.”
Photographs by Mridula Chari.
Small business, big setback
The impact of the Goods and Services Tax