A textile unit in Ludhiana, Punjab. Photo: KG Sharma
A textile unit in Ludhiana, Punjab. Photo: KG Sharma

A year since the goods and services tax (GST) was introduced, Gurmeet Singh Kular is still waiting for his tax refund of over $300,000. His predicament is typical of many small and medium-sized companies in the state of Punjab, where implementation of the tax has had a severe impact on a vast number of businesses.

Kular is the managing director of Darshan Kular Cycle Industries.  His small-scale unit buys raw material that falls in the 18% and 28%-GST band. His finished goods are taxed at 12%. So, he’s entitled to refunds ranging from 6% to 16% from the tax department.

The country’s first uniform indirect tax regime came into force on July 1, 2017 with the goal of creating a “one nation, one tax” system. Sadly, it’s precipitated the worst-ever cash crunch for Punjab’s business community. Punjab used to be one of India’s best performing states in terms of agriculture and industry.

Companies in the northwestern state manufacture hosiery, sports goods, bicycle and bicycle parts and processed food. Punjab is home to the likes of Vardhman Textile, Hero Cycle, Avon Cycle, Duke fashions, Sportking Clothing, Aarti Steel, Trident Group and Cremica. Hero Cycle and Vardhaman Textile have an annual turnover of over $700 million each.

Turnover hammered by tax cost and delays

Medium, small and micro (MSME) enterprises, however, form the backbone of the state’s economy and, by 2015, there were as many as 111,743 MSME units operating in Punjab. The bulk of them are concentrated around Ludhiana (37,047), Jalandhar (13,764) and Amritsar (10,708). Most hosiery and bicycle plants are located around Ludhiana, while the sports-goods industry is clustered in the Jalandhar region.

Kular, who is also president of the Federation of Industries and Commercial Organizations (FICO), says the principle of a single tax has been defeated by the GST’s multiple tax slabs of 5%, 12%, 18% & 28%. “In Punjab, there are around 4,500 bicycle and bicycle parts units with a turnover of $950 million a year. About 7-8% of the total turnover, $70-80 million, is being held up by the GST authorities,” he said.

Value addition in the bicycle industry is barely 3%-5% and the GST refund amount exceeds the industry’s margins, he said. In fact, their working capital has been diverted and companies forced to use cash and credit facilities to pay tax. As a result, in the first quarter after the GST came into force, turnover and production in the bicycle industry fell by 30-50%, he said. And in some cases, it has come down by even 70%.

“Even one year later, most of the units have not returned to pre-GST turnover levels. Moreover, the state government is yet to refund the $100-120 million collected as value added tax (VAT) in previous years.”

Ajaya Mahajan, chairman of the Sports Goods Manufacturers & Exporters Association, said that in its first quarter since the GST was implemented it played havoc with their businesses. “Due to the ambiguity and uncertainty about the GST regime, turnover and production of most units fell drastically. There are around 1,500 sports-goods manufacturing units in the Jalandhar region, out of which about 300 units are export units. On an average, most of the units were affected, with a 30-50% fall in sales.”

Ajaya said the working capital of more than half of these workplaces was held up in the new tax regime due to the late processing of GST refunds. “Slow and cumbersome system of disbursement of GST refund is a big issue. GST authorities have disbursed some funds, but refunds of $150-170 million are still pending,” says Mahajan.

Inefficient implementation, officials ‘clueless’

Arun Kanwal, president of the District Taxation Bar Association, said: “The online system for filing GST returns and claiming refunds is incomplete, [and] sometimes it doesn’t work. There is a mismatch of data on turnover and tax in most cases. Officials are not fully conversant with the online system, rules and regulations and have been delaying GST refunds. The GST department has [only] disbursed refunds of about $50-60 million of the more than $300 million pending claims in the state.”

SC Ralhan, president of the Federation of Indian Exporters Organisation (FIEO), said: “During the implementation period, working capital funds of export units have been depleted due to late reimbursement of refunds. Now it is improving, but still a huge amount of $125-150 million in refunds to exporters is pending.”

Sukhdarshan Jain, president of Knitwear & Apparel Manufacturers Association, says the apparel industry faced serious problems due to the change in the tax system. But while they suffered financial losses, he believes that in the long term the GST system will be good at the national level.

Businesses are yet to master the complexities of the new indirect-tax regime, partly due to the incomplete online-GST rollout. In fact, filing returns, depositing tax and claiming refunds under the GST is impossible without the help of experts and professionals. But even they have been unable to resolve many of these issues because most GST staff are untrained and reportedly clueless on how to deal with problems faced by the businesses they administer.

A mismatch of data on GST returns and refund forms is routine. The e-way-bill system for movement of raw materials for job work and finished goods for packing and sale is also causing confusion. Most small-scale units are unable to engage professionals and tax experts to fulfill the GST procedures as they face a cash crunch and can’t afford such fees.

Ravneet Singh, deputy commissioner of the GST Policy Wing, said: “[Our] department personnel have been trying their best to lay down a smooth procedural system as well refund system in more effective and proactive ways, even holding special drives to solve problems related to refunds.”

According to tax authorities, more than $300 million is stuck in the GST refund system for Punjab alone.