Hammers and other tools lay on the floor of a small metal factory in India. (Photographer: Sanjit Das/Bloomberg)  

Budget 2019: How Even A Well-Meant Policy Can Make Small Businesses Suffer

India slapped an anti-dumping duty on Chinese imports to protect domestic steelmakers. For Rajeev Gupta’s small business that exports construction material, it was a setback.

The duty pushed up the price of domestic steel, increasing raw material costs by 15-20 percent, said the owner of Synergy Metals Pvt Ltd. that makes scaffolding and formwork. “Buyers preferred us because of better quality but I lost a lot of business in Australia as prices of Chinese competitors are lower,” he told BloombergQuint at his factory office in Mohali, Punjab.

Gupta suggested that India should refund anti-dumping duty to small businesses like many other nations that have imposed similar tariffs.

The case illustrates how even a well-intentioned policy can hurt the so-called micro, small and medium enterprises—contributing nearly a third of India’s GDP—even as they battle familiar hurdles. The entrepreneurs BloombergQuint spoke with in Punjab complained of delayed loan approvals, cumbersome compliance with goods and services tax and a bureaucracy that makes it difficult to claim incentives. Much like their peers in Gujarat and Karnataka who struggle to cut through red tape despite India’s massive jump from 130 to 77 in the World Bank’s ease of doing business rankings in the last two years.

Also read: Budget 2019: For These Small Businesses In Gujarat, Loans Take Far Too Long

In March last year, Yogesh Sagar bought better machines for his plant manufacturing automobile parts and scaffolding. The government’s Credit Linked Capital Subsidy Scheme for technology upgrade allows an upfront subsidy of 15 percent of the costs. His May Steels Pvt. Ltd. hasn’t received the money yet.

Usually, it’s credited within two-three months after submitting the documents to the bank from where loan was taken for the machines, said Sagar who is also the president at Mohali Industries Association. “We request the government to implement the law effectively.”

Workers at May Steels Pvt. Ltd. factory in Mohali, Punjab. (Source: BloombergQuint)

That’s just one of Sagar’s problems. He said large companies don’t pay up on time even though the MSME law mandates that all payments must be made in 45 days.

There have been instances of a delay of nine months, he said. “One of the reasons for the delay is less cash in the market,” he said. “India is still facing the impact of demonetisation and GST.”

Prime Minister Narendra Modi’s cash ban had sucked out nearly 86 percent of the currency from the economy. Small businesses, a majority of which are engaged in the informal economy, ran out of cash. Within months, goods and services tax that increased compliance burden was rolled out.

Entering central, state and integrated GST entries in the books has made filings cumbersome, Gupta of Synergy Metals said. The GST software should be designed in such a way that it identifies the entrepreneur from the GST number and auto-fills forms, he said.

Suresh Nair, partner, indirect taxes (infrastructure, industrial and consumer), EY, agreed that GST return filing and compliances have been areas of concern for small businesses. “There have been challenges around reconciling the [input tax] credit.”

Gupta said businessmen are also confused about rate changes, adding that led to people at times charging different rates on the same product. Even tax officials in Mohali had no clue, he said. “It’s not possible for a small entrepreneur to keep pace with changing rates, multiple returns and new forms.”

Nair of EY said MSMEs face the challenge of knowledge and lack of access to desired technology and automation to improve compliance. He said the GST Council’s decision to increase the exemption threshold and a higher limit to pay a fixed rate under the composition scheme could reduce the burden for the sector.

The GST Council has also lowered rates on a host of products in the past year. But Kamal Dhupar, the owner of Ohri Industries Ltd. that makes tractor parts, is unhappy.

Tractor components are taxed at 18 percent and 28 percent, he said. Manufacturers buy tractor parts at a higher rate but charge 12 percent on the finished product, he said. They pass on higher costs which is pinching consumers—in this case the farmers, he said.

A worker makes nuts and bolts for tractors at Ohri Industries Ltd., Mohali. (Source: BloombergQuint)
A worker makes nuts and bolts for tractors at Ohri Industries Ltd., Mohali. (Source: BloombergQuint)

Not everyone is complaining.

Iqbal Singh, whose Comments Industry Pvt Ltd. makes kitchen counters for hotels and bakeries, said sales had fallen by 25 percent as deep freezers and water coolers were placed in the 28 percent slab. “But we have recovered as the GST rate has been reduced to 18 percent.”

Transporting goods has also become faster. There were a lot of levies like octroi, excise, value added tax, which led to higher effective tax rates and also delayed shipments, he said. “Now there is only single tax. Our vehicles used to wait for two to three hours at check posts at state borders. The turnaround time has reduced.”

Still, Gupta wants India to provide more incentives so that small exporters like him can compete with peers in China. “If the price difference with Chinese products remains, we won’t be able to export much. I have lost many orders because of not matching the price with the Chinese.”

Also read: Budget 2019: Farmers Of This Village In India’s Wheat Bowl Can’t Do Without Middlemen