On the eve of its rollout, auto parts dealers in Delhi’s Kashmiri Gate are haunted by fear of GST

Even before the gong is struck at the midnight hour of June 30-July 1, it would help Prime Minister Narendra Modi know that an ogre has been stalking the alleys and cul-de-sacs of the wholesale automobile market of Delhi’s Kashmiri Gate. The ogre’s name is Goods and Services Tax – a single tax on the supply of goods and services that replaces all state and central levies . Its face is rectangular and resembles a computer screen. It is said to have claws, sharp enough to injure and bleed to death those who resist it.

Dealers in Kashmiri Gate access automobile parts manufactured in what is called the generic sector, at prices far lower than those big automobile companies charge for the same products. Their profit margins are low, but a high turnover, because of low prices, more than makes up for it.

To Kashmiri Gate come agents and traders from Delhi and districts in Haryana, Punjab and western Uttar Pradesh. They make their purchases here and sell back home at a price into which is built a small margin of profit. They all now fear the GST ogre will devour their margins and drive them out of business.

But this grim outcome is still months away. At the moment, their anxiety arises from purchasing a computer, learning how to generate bills, creating a computerised accounting system, and then linking themselves online to the GST Network, the organisation that will process all data under the new tax regime.

No doubt, it is a simple task for those who have worked on computers for years. But it is not so for most traders in Kashmiri Gate – they have largely worked with cash; bills are squiggles on a piece of paper giving out the amount their purchasers need to shell out.

The old working style will now have to give way to the new.

Unfamiliar territory

Baljit Singh Sethi is among the many struggling to adjust to this new order. Now 63 years old, he has been selling automobile parts for 40 years. Sethi had his son send him a laptop from the United States.

For a man who still has his emails downloaded and printed from a shop in the vicinity, the new system seems daunting. He will have to purchase a printer and get GST-compatible software installed in the laptop. For all this, he has come to Vinay Narang, treasurer of the Automotive Parts Merchants’ Association, for assistance.

How will he cope? Sethi grinned and said, “I will ask the guy who will come to install the software to show me – kaise mein computer ke andar ghoosun aur kaise bahaar auoon [how to enter and exit the computer].”

A good many shops are yet to install computers. Partly because they want to figure out the extent to which doing business without a computer would be a hindrance before they shell out money for it. Partly, a good many shops have, quite literally, no space for it.

At the opening of one of the many cul-de-sacs sits Sanjay, in a flamboyant red shirt, stacks of automobile parts looming over him in his three-foot-by three-foot shop. He has just about managed to squeeze in a stool to sit on. No space for a computer, he said. He does not have much time to computerise his business, does he?

Sanjay remarked sarcastically, “I will put up Modi’s photograph.” Not far from him is NP Singh’s kiosk. Frowning, he said, “Modi should have given us a computer, no? After all, his government is going to make money from us.”

Kashmiri Gate bristles with anger, its edge blunted by dark humour.

Three strikes

But the anger pales in comparison to the fear the GST ogre has stoked here. This is because they feel the economic dynamics of the market will be altered radically. It is a third blow delivered to them.

The first came roughly five to six years ago. It was when automobile companies took to opening their retail outlets and depots countrywide, said Vinay Narang. They surveyed the market and gave special discounts on products that sold very well. This eroded, to a great extent, the price advantage Kashmiri Gate boasted.

“By giving a special discount, the automobile companies lowered the price of a hot-selling product, say, to Rs 200,” Narang said. “Ours, say, is priced at Rs 185. With the price difference being minimal, the customer will, obviously, opt for a product with the brand of a reputed company.”

Demonetisation, the withdrawal of high-value bank notes in November, was the second cruel blow. It disrupted the supply chain for months. Though this was a temporary setback, it cut deep small dealers working on small profit margins.

The third blow has been delivered by the GST ogre, which is, as is popularly perceived, working at the behest of automobile companies.

Cost savings gone

Narender Madan, chairman of the Confederation of All-India Traders, said, “Whichever way you look at GST, it seems the government only spoke to big companies, the foreign ones, and created a tax regime to their advantage. Other stakeholders were not spoken to – for instance, dealers in Kashmiri Gate and small manufacturers operating in and outside Delhi.”

Why is GST believed to be loaded in favour of big companies and against small manufacturers, whose economic prospects impact crucially on dealers operating from Kashmiri Gate?

This is because Kashmiri Gate’s dealers purchase from manufacturers who produce generic components and usually have a turnover of less than Rs 1.5 crores a year. Until the advent of GST, such manufacturers were required to pay only 12.5% Value-Added Tax (a multi-stage tax levied at each step of production of a good or service).

The big manufacturers (including even those who do not produce but sell goods produced by others under their brand names) also paid Value-Added Tax, but they paid an excise duty of 12% in addition.

Thus, small manufacturers had a cost advantage of 12% over the big boys of the automobile market.

This advantage of 12% was further augmented by the minimal expenses small manufacturers incur on running their business. They employ less labour and, therefore, do not have to provide provident fund for their employees. Some, though, cut corners and show fewer labourers on their roster than is the case.

Again, the paucity of jobs has workers accepting wages below the statutory minimum levels. Also, working conditions at such establishments – such as fire safety norms, ventilation – are rudimentary and not enforced as stringently as these are at automobile companies.

These measures are undeniably unethical and illegal. However, they enable small manufacturers to remain competitive and, ironically, account for nearly 34% of India’s employed.

Through such measures, small manufactures save anywhere between 7% and 10% of the expenses the big players incur. “Therefore, add this 7%-10% of expenses saved to the 12% excise tax they were not required to pay. To this, add 5% of the difference between the profit margins of small and big players. So, roughly, the small players had a price advantage of 25%-27%,” Madan pointed out.

The lower price offered by small manufacturers is why dealers in Kashmiri Gate procure components from them. It suits them because it suits the pockets of their customers.

But GST will deprive small manufacturers of much of their advantage. They will have to pay 28% GST (28% is the tax levied on automobile components) – more than double the Value-Added Tax they paid earlier. Thus, of the 25%-27% cost advantage that they enjoyed, the 12% excise tax that was waived for them earlier is now straightaway gone. Therefore, the price of their products will rise, more or less, in the same proportion.

In contrast, the prices of products of big manufacturers will go down relatively. Earlier, they paid 12.5% Value-Added Tax and 12% excise duty, but now everyone, big and small manufacturers, has to pay 28% GST. However, unlike before, the biggies will be entitled to a refund of “input tax credit” (which means tax already paid on inputs will be deducted from the tax paid on output). This advantage – of getting the excise part of GST refunded – did not exist for them earlier.

This is best explained through an example. Say a person A has produced a component that he has priced at Rs 1 lakh. Assume the raw material he used to produce it falls in the slab of 18% GST. The input credit for A will be Rs 18,000 – of this, Rs 9,000 will be Central GST and the remaining Rs 9,000 state GST. Now A decides to sell it to B at Rs 1.25 lakhs. The finished automobile component will now come under 28% GST. It, therefore, incurs Rs 35,000 GST.

Since A had already paid Rs 18,000, his tax liability is Rs 17,000. But he will be required to pay Rs 35,000 and then wait for the Rs 18,000 already paid to be refunded. (A part of it would have constituted the excise part of his total liability under the earlier tax regime.) The next chain will also work accordingly: B will get a refund of Rs 35,000 from the amount of tax included in the price he sells the component to C, as this amount has already been paid by A to the government.

This means a small manufacturer will have to organise additional capital for the duration in which his own money is locked, that is, until he gets a refund from the government. Will he raise it from the market? Then money borrowed on interest will get factored into his cost. (This is as true for traders of Kashmiri Gate.)

Expenses go up

With small manufacturers losing out on the price advantage they enjoyed because of GST, the playing field becomes uneven for them. Big companies have economies of scale. They place bulk orders with their vendors, who are able to purchase, for instance, raw material at a cheaper rate in comparison to small manufacturers in the generic market.

With the earlier advantage of excise waiver eroded, the small player will now find that the big player produces goods at rates marginally higher or, at times, lower than his. This will limit his scope to play around with price differentials between his products and those that are branded.

In addition, an element of the small manufacturer’s expenses will rise. Till now, he would buy a bill book, ledger book, a cash book, and a daily sales book to record his transaction, altogether costing him Rs 2,000 a year. He would engage a part-time accountant for Rs 12,000 a year to manage his accounting.

This will no longer do. He will have to submit his sale records between the first and 20th day of every month. Between the 11th and 15th, he will have to put up his purchase for scrutiny. From the 20th thereafter, an email will communicate to him the refund due to him or the amount he owes as tax to the government.

Thus, sales and purchases will have to be recorded as they happen and reporting done within the time limit prescribed or else he will be penalised, though this clause will kick in after two months. (This is as true for dealers, the reason for their anxiety, particularly as so many of them are computer-illiterate.)

In other words, the increase in cost of producing a component in the generic sector will jack up its price in comparison to the pre-GST era. It is at the new price that dealers in Kashmiri Gate will now make their purchase. The automobile company-owned retail stores will give dealers in Kashmiri Gate a run for their money.

Both small manufacturers and dealers will have to now also bear the cost of accounting mistakes, willful or otherwise. Not only this, mistakes, delays, and omissions in tax submission will bring the chain of which he is a part to a halt.

Here is why: Assume a good passes from A to B to C and D. Each has to pay 28% GST. The authorities will then calculate the deductions arising out of the input tax credit each is entitled to and then refund the amount to them. Suppose A’s tax liability is Rs 1 lakh. But, because of a calculation error, he pays Rs 99,000. Then the refunds will also be stopped for B, C and D. Assume all four are small manufacturers or small dealers. This means B, C and D will have their capital locked, their monthly business cycle affected. In other words, they will suffer for no fault of theirs.

There is apprehension that agents from Punjab, Haryana and West Uttar Pradesh will no longer flock the Kashmiri Gate market. Take an agent who comes from Panipat to Kashmiri Gate to purchase headlights. There are 10 retailers in Panipat who need two headlights each. The agent buys 20 from Kashmiri Gate and distributes them among his 10 customers in Panipat.

This trade works on money. The agent gets a commission from each of the 10 customers. But with the facility of input tax credit to avail of, based on the sale and purchase invoices submitted online, the seller in Kashmiri Gate will want to issue a bill, and the customers in Panipat will demand it as well. The agent must have a GST number and he must pay GST.

Does he have the requisite financial resources to pay the GST amount owed to the government by others in the chain before him? After all, the refund to him will come later. No, most agents say. For instance, Sanjeev Kamboj thinks GST will crush people like him. Mohd Zulfikar supplies motor parts to Azadpur in Delhi. A Class 7 pass, and too awed by a computer, he said he has decided to drive an auto from next month.

No beating the GST ogre

Theoretically, there are tricks to beat the GST provisions. For instance, the 10 retailers in Panipat can show the commission paid to the agent who procured the headlights for them from Kashmiri Gate as their transportation cost. But before resorting to this ruse, the seller in Kashmiri Gate will have to provide each of the 10 retailers with a separate bill showing he sold two headlights.

But the trade does not work on theory, according to Hitesh Ahuja, who owns a shop in Kashmiri Gate. “The agent’s knowledge is a specialised one,” he said. “He knows from where good quality products at cheap rates can be purchased. Once his customers know from where he makes purchases, why will they hire him? They will make purchases directly.”

This might not make sense for an individual retailer in Panipat – to secure two headlights on his own will have both cost and time implications for him. It is also cumbersome. So, most likely, he will turn to the nearest retail store of the automobile manufacturer, get a bill and claim input tax credit.

Sure, it is a legal way of doing business. Sure, it protects the commercial rights of big companies. But it will also drive out of business agents coming from districts close to Delhi and, therefore, also the dealers in Kashmiri Gate.

Indians are famous for jugaad or innovation. They will try their best to ensure the GST ogre does not claw them out of business. Kashmiri Gate is already agog with ways to beat the ogre. For instance, take the fan belt, which has several uses. It attracts 28% GST when used as a motor part, but falls under a different tax slab for industrial uses. “The only difference between different types of belt is its length. Will the GST authorities know the difference?” asked Madan.

But if the GST ogre knows even that, they will be certainly cannibalised by big companies.

Ajaz Ashraf is a journalist in Delhi. His novel, The Hour Before Dawn, has as its backdrop the demolition of the Babri Masjid.