At Marcellus, we have written about the formalisation of the economy driven by GST among other factors and the resulting consolidation of industry into a few large players at the expense of the small and medium enterprise sector. This piece in the Outlook Business takes a look at the fate of the Foundry industry in Coimbatore known for serving the needs of the thriving textiles sector originally and then eventually the automobile sector. The city is known for its myriad micro SME’s, which are now suffering the burden of GST, its compliance and the consequent rise in working capital, all at a time when end demand has slowed down.
“Foundries are central to the city’s economy but, for the past decade, they have been dealing with one spanner thrown in after another. Earlier, it was the power cuts and shortages, then came a crackdown by the state pollution control board and then a new taxation system. Ezhil says that the first is a thing of the past and the second has largely been dealt with, but the third — Goods and Services Tax — remains heavily taxing. On one hand, GST has driven up prices of inputs and their products.
The taxation policy has businesses tangled up in red tape. Senthil Kumar, founder of Bluemount Castings, says compliance requirements have pushed companies, especially the MSMEs to the brink. “I’m a mechanical engineer, but operate like a chartered accountant. I’m constantly wondering which returns to pay on which day, and in the process, get little time to help my company innovate,” he says. He claims that his business, which caters to clients such as BHEL, KSB Pumps and tractor builders, has been hit by 30% at the very least.
The micro-scale enterprises are most likely to face the pinch, according to S Soundara Rajan. He started with a single lathe (tool that rotates a workpiece) when he co-founded Falcon Toolings, and today, he employs 260 people who work on 60 machines. “Larger companies have entire departments to take care of filing GST and compliance. The smaller ventures in Coimbatore simply cannot afford such privileges. They are largely a one-man-show with a technocrat at the helm,” he says.
An entrepreneur, who wishes to remain anonymous, laments how he had to go to the office on a Sunday to check if his supplier had filed their sales data on the GSTN portal. You can claim input tax credit (ITC, or discount on tax to be paid on sales) only for services from suppliers who have filed their sales data on or before the 12th of every month. Any delay on the suppliers’ part holds up the claim-and-refund process by a month for everyone upstream. On the 12th of every month, the GSTN portal allows you to check who among your suppliers has completed the process and, in January, 12th fell on a Sunday. “With the current system, the work of the government officials has been shifted to the tax-payers,” says the entrepreneur.
Falcon Toolings’ Rajan believes that the GST system also robs smaller enterprises of opportunities. “A big company thinks twice about giving job orders to a young, promising company that has no GST number,” says Rajan. When you rope in a subcontractor, a smaller player usually, you pay a tax on the job work, which is work applied on another person’s work, such as welding or painting. Without a GST number, a subcontractor cannot issue you a valid receipt to claim input tax credit.
Job work itself has become more expensive. Under the value-added tax regime, it attracted zero tax provided that you accounted for the payment done for it. As per GST norms, it was taxed at 18% till it was brought down to 12% through petitioning by Coimbatore District Small Industries Association (CODISSIA) under the leadership of its current president, R Ramamurthy. The attempt now is to bring it down to 5%.
Foundries now face higher bills, which come more frequently than the paychecks. “One needs to file the 28% GST amount within 45 days of delivering a service, while payment cycles of corporates are typically 60 days. It holds up the working capital,”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
