Topping the list of demands of the GST Sangharsh Samiti, the textile traders’ body that is leading the strike that has shut down a four-km stretch of the country’s biggest cloth market on Surat’s Ring Road, is exemption from the Goods and Services Tax (GST) — or at least, an 18-month GST holiday. This what the textile traders asked for at their meeting with Finance Minister Arun Jaitley on Monday — and came away with the assurance that it would be taken up at the next meeting of the GST Council on August 5.
Behind the traders’ indefinite strike, however, is not so much the prospect of higher costs under the “tyrannical” GST regime, as the fear of their business being brought out in the open — of it being subjected to the full glare of financial scrutiny and “mandatory accounting”, say those who are intimately associated with the trade. Surat sends out saris — mostly the cheap, synthetic variety that costs a few hundred rupees per piece — worth nearly Rs 135 crore every day across the country. At least 80% of this massive business is carried out in the dark, say veterans of the trade. GST aims to bring every link in the chain of transactions on record — possibly raising the price of the cheapest saris and dress materials from Rs 70 to Rs 150-200, according to trade experts.
“Between 3.5 crore and 4 crore metres of cloth is woven in Surat every day on average, and sold to other states, cities, and even foreign countries,” Ashok Jirawala, president of the Federation of Gujarat Weavers’ Association, said. While most saris are unbranded local products, Surat is also home to some big brands like Rachna, Prafful, Parag and Garden Vareli.
The textile trade supply chain had so far been exempt from indirect taxation. “Now”, said Pandesara Industrial Association president Ashish Gujarati, “there is 18% GST in place of the combined VAT and excise on yarn. When the weaver sells the bale to the textile trader, the trader is liable to pay 5% GST. As the textile trader sends the bale to a mill for dyeing and printing, he will pay processing charges with 5% GST. After the cloth is dyed, printed and returned to the textile trader, he sells it to the wholesaler, again with 5% GST. The wholesaler adds his profit margin and sells it to the retailer with 5% GST.” According to Gujarati, the pre-GST cost arithmetic was as follows:
Yarn manufacturers, who paid 12.5% VAT and 5% excise duty, sold 1 kg of yarn to weavers for Rs 118. A kg of yarn yields around 15 m of woven grey bale (about two retail saris). The textile trader purchases this bale for Rs 16 per metre on average — or Rs 240 for 15 m of cloth. The mills that process (dye and print) the bale, charge Rs 12 per metre on average — so, for 15 m, the textile trader has to pay Rs 180 to the mill owner. Thus, the total cost of the finished cloth from 1 kg yarn is Rs 420 for the textile trader. “The textile trader sells his material to wholesalers in other states and cities, keeping a profit margin of around 15% on the cost price. The wholesaler sells it to the retailer, again keeping a margin of 15%, and the retailer keeps a margin of between 10% and 15% while selling to the customer,” Gujarati said.
However, GST gives weavers, mill owners and traders input credits at different levels. As per the pre-GST tax structure, a combined excise duty and VAT meant 18.16% tax imposed on yarn manufacturers, which the weavers would pay during purchase of stock. Under GST, weavers stand to receive 12% input credit, thus bringing back benefits.
“This benefit will be passed down the chain. The textile traders and processors also stand to benefit from input credit options as traders get an input credit of 5%, and processors will receive input credit for chemicals and dyes, which form almost 30% of the business, 5% input credit for coal for powerlooms, and so on,” said Jitendra Vakharia, president of the South Gujarat Weavers’ Association.
“Ultimately”, Vakharia said, “the chain of traders will also have to pass on the benefit to the consumers.” Ahmedabad based tax expert Monish Bhalla said tax calculations after GST put a liability of only 0.5% tax on the traders. “So far, only manufacturers and service providers of the industry fell under the purview of taxes, which added up to 18% even pre-GST. In fact, with the input credit system under GST, the chain of textile processors stand to gain at least 5% input credit at various stages. But on traders who were out of the purview of excise and other taxes, GST will impose a liability. This protest is not against GST, but against getting accounted,” Bhalla said.
Traders readily concede most of their business was “unaccounted” in order for them to avoid income-tax. With GST, accounts of the business will also lead to higher income-tax for traders with bigger turnovers. Said a trader who has been supplying saris to south Indian states for over two decades, “We have always showed only a part of the transaction in the books, and the rest of the trade has been trust-based. But with GST, the entire business has to be put on the books. It will be difficult to hide volumes, and we will be liable to pay higher income-tax on our turnovers.” In fact, while the traders’ strike has brought Surat’s sari business to a halt, manufacturers and service providers remain in favour of GST. Said Vakharia, “Since the strike began, I’ve not had even a quarter of my monthly business. The traders’ protest is not against GST, and those who don’t fall in line soon, will not be able to recover at all.”
Industry veterans say losses due to the strike have crossed Rs 5,000 crore. Textile mills in the Sachin, Pandesara and Palsana areas are unsure how the pre-GST stock would be cleared. Traders say they have the same problem: they can’t declare old stock. Bhalla said pre-GST stocks was “a genuine issue, whether accounted or unaccounted”, and the government could perhaps waive the liability on stocks declared until June 30. “They could also have a composition scheme for textile traders, like they have for small businesses. The government should allow them a composition scheme up to Rs 5 crore. But to do this, the Act, which currently has a Rs 1 crore cap, will have to be amended.”
Surat city is famous for its synthetic fibre, and is estimated to produce over 40% of the country’s total. Synthetic saris are cheaper, and therefore, in great demand among the poorer sections. Surat also produces high quality saris for a more affluent clientele. There are over 9 lakh powerloom machines in Surat city and district, and the daily turnover of the factories is estimated at Rs 90 crore. Over 4 lakh labourers from U P, Bihar, Maharashtra, Odisha, West Bengal and Rajasthan work and live in Surat, turning the wheels of a vibrant sub-economy. The strike has impacted their lives, as also the lives of those in businesses such as transportation.