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Grey economy struggles under GST’s weight

LiveMint logoLiveMint 20-07-2017 Iain Marlow

New Delhi/Mumbai: On the edge of one of India’s biggest slums, Alauddin Ansari opens a paper ledger of daily sales at his small leather shop and points to a blank page. That’s the tally for today. Nothing.

Before Prime Minister Narendra Modi introduced the country’s new goods and services tax on 1 July, Ansari said he was earning Rs6,000 a day selling leather jackets, wallets, bags and belts. But India’s new tax classified leather products as luxury items and raised the rate to 28%—more than double the 13.5% tax levied until 30 June. Since then, his business has collapsed.

“My business is down nearly 75%,” Ansari said, turning a page to show he made just Rs850 the previous day at his shop near Mumbai’s vast Dharavi slum. “Obviously, the GST has had an impact on trade. At 28 percent, GST is a bit too much.”

The leather sector is just one example of how India’s vast informal economy—which accounts for more than 90% of the workforce—is struggling under India’s new tax rates, which range widely from exemptions for items like basic food grains to 28% for products like air conditioners.

With an annual turnover of around $12 billion and as many as 3 million workers, the industry must also deal with Hindu nationalist attempts to ban bovine slaughter, which they rely on for raw hides, and rising incidents of violence from “cow protector” vigilantes.

Economic chaos

Even supporters of the tax expected months of economic chaos as millions of shopkeepers and manufacturers were dragged into the tax net for the first time. But many labour-intensive sectors—from leather to textiles—fear newly-high rates will have a lasting impact on industries that provide billions in export earnings, raising the chance that India’s trade balance could widen in the next few months.

Although it should increase tax compliance and government revenues over time, analysts are still waiting to gauge the short term disruption now rippling through India’s $2.3 trillion economy. The GST comes less than a year after the government’s shock cash ban sucked 86% of the nation’s currency out of circulation overnight, knocked India’s GDP growth down to 6.1% from 7.1% and eliminated as many as 1.5 million jobs.

Employment impact

The struggles of small leather retailers are indicative of the broader pain being felt by many small-and-medium-sized businesses in India’s informal sector, said K.E. Raghunathan, president of the All India Manufacturers Organisation. Other unorganized sector workers making firecrackers, matches, textiles are also suffering, he said. And recent textile worker protests—in which some burnt effigies of finance minister Arun Jaitley—made little difference to the government’s plans.

“Their voice is never heard,” Raghunathan said, adding that small businesses are “unable to survive” because there are “no orders, no payment collection” because of the GST.

As many businesses were emerging from demonetisation, when cash-strapped consumers avoided all-cash businesses and put off purchases, the GST added additional complexity. The impact of finally paying tax will create “significant challenges” for the unorganized sector, particularly for those who deal in lower-priced items, Jefferies analyst Piyush Nahar wrote in a note on 13 July.

“As it boosts compliance, GST will have a negative impact on unorganized sector firms which rely largely on tax arbitrage,” Nahar wrote. “While we believe that firms who benefit from tax non-compliance should face consequences, we are concerned on the impact on employment.”

At another leather store in Dharavi, Anwar Sheikh explains that the GST-related downturn may force him to lay off one of his two employees.

“Earlier, I used to do sales worth 4,000 or 5,000 rupees,” Sheikh said. “This afternoon, I have made sales worth 250 rupees. For how long will this last?”

Cow vigilantes

For the mainly-Muslim workers who toil in the leather industry, which cow-revering Hindus tend to shun for religious reasons, there is additional uncertainty.

Modi, who condemned the spate of cow-related violence, has presided over an administration that has tried to introduce rules banning the sale of cattle and buffalo for slaughter in markets across the country. In May, the Supreme Court stayed that decision for three months.

There have also been numerous attacks—as well as beatings and attempts at extortion—on farmers and livestock transporters as they brought animals to and from local markets. In Rajasthan, one farmer was beaten to death. Industry representatives have complained that local authorities are failing to stop the violence. That means poor farmers are too afraid to sell spent dairy buffaloes to the slaughterhouses which power India’s leather and meat export industries.

“Adding to our misery are all these killings related to beef and in the name of protecting cows,” Sheikh said. It “just makes it harder for us as Muslims to do business. We feel very insecure.” Bloomberg

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