On Tuesday, just two days before Diwali, the automobile spare parts market on Hamilton Road in Delhi’s Kashmere Gate area was deserted. The stretch with around 5,000 shops that deal in various components for commercial and passenger vehicles had hardly any buyers.
RK Chawla, the owner of Sneh Traders Private Limited, blamed the lack of business on the Goods and Services Tax, which incorporates all Central and state levies into a common nationwide tax and was introduced on July 1. Its implementation has been hobbled by multiple problems that have had an immediate impact on businesses across the board.
“We used to do an annual turnover of about Rs 15 crores but this year, we will be happy to do even Rs 2 crores,” said Chawla, who is a wholesale supplier of auto parts for commercial vehicles. He has been running the family business for 30 years after taking over from his father.
Most of his buyers are from the National Capital Region, including Noida in Uttar Pradesh and Gurgaon in Haryana. Wholesalers and retailers from these areas would place bulk orders with him.
But the orders are no longer coming, Chawla said. This is because auto components fall in the highest Goods and Services Tax slab of 28%. “Nobody wants to pay 28% to us because their costs will rise and how will they sell it to their customers at a cheaper rate if they cannot avail input tax credit?” he asked.
Input tax credit is a tax deduction companies are allowed based on taxes they have paid while buying inputs to provide goods and services.
Inter-state trade suffers
Chawla claimed the Goods and Services Tax had brought inter-state trade in the National Capital Region to a halt. He blamed it on complicated compliance requirements that force small and medium traders to register in all the states they procure goods from in order to be eligible for input tax credit, irrespective of whether they have a business presence in those states.
This is how it works. Say, a wholesaler in Gurgaon pays 28% tax in Delhi to procure goods worth Rs 1,000. It works out to Rs 280, including Rs 140 as Central GST and Rs 140 as State GST. Since the supply has been made over the counter in Delhi, the buyer can claim input tax credit on the State GST of Rs 140 only if he is registered as a Goods and Services Tax trader in Delhi. The auto parts industry says this requirement has resulted in a big drop in sales.
According to RK Gupta, president of the Automotive Parts Merchants Association, sales are down by at least 50% because of the tax compliance burden.
“There is no buyer in the market, who do we supply to?” he asked. “The problem is that the compliance burden is so much for the retailers who come from NCR [National Capital Region] to buy goods from us that they are no longer coming and they choose to buy from wherever they are located without having to bear transportation costs.”
He added, “We are not even able to make rent for our shops.”
Thriving black market
While business is down in the auto parts market, a black economy is booming where traders procure and provide goods without a formal invoice that contains the Goods and Services Tax component.
Mirza Danish has been dealing in auto parts for a decade now and claims he has not seen a slowdown like the present one. But he said he has managed to stay afloat by “going informal”. As a result, he is doing more business than the others.
While the 30-year-old possesses a Goods and Services Tax registration number, most of his transactions are on a “no-invoice” basis where no receipts are generated and no taxes collected from either his suppliers or his customers, who are also retailers from the National Capital Region. This allows Danish to save on taxes and keeps his goods competitive in a market where prices have skyrocketed because the tax rate has risen to 28% from 12.5% in the previous regime.
“No customer wants a GST bill with 28%, so we don’t provide it,” he said. “Every retail customer wants the lowest possible cost because they cannot pass it on to anyone. So we do business without invoices. You can call it black or whatever but that is the only way to survive.”
This black economy may not be big as of now but it threatens to become larger if the government does not come up with quick solutions to the various problems businesses are facing in the Goods and Services Tax era.
“We would also like to be in the formal economy and pay taxes as mandated but it is not possible if the government keeps harassing us like that,” said Satish Kumar, a trader in the same market. “The idea was to increase tax base by introducing an easier taxation system but GST has only increased our bills for chartered accountants. And if the government does not take away this requirement of getting registered everywhere, our businesses will tank and inter-state trade will become zero.”
Showing a video clip of traders in Kanpur taking off their shirts in protest against the new tax, Kumar said similar action was required in Delhi to get the government’s attention, else everyone would choose to conduct their business without bills – the opposite of the new tax regime’s stated aim of helping the formal economy expand.
Photographs courtesy Mayank Jain.