A looming crisis

Even as India’s status as Asia’s largest producer of man-made fabric faces stiff challenge from China, the sudden induction of the hitherto tax-free textile sector into the GST regime has devastated traders and workers alike in the textile town of Surat.

Textile traders and workers block a road during a strike they organised in Surat in July 2017.

SURAT, the famed “cloth city” of India, accounts for as much as 80 per cent of the country’s man-made fibre market and virtually 100 per cent of its production of synthetic sarees and dress material. The wholesale synthetic textile market in Surat is located on a 1.5-km stretch of its arterial ring road, lined with 185 multi-storey buildings on both sides. Each building has an average of six floors and about 5,000 to 7,000 shops. The scale of business is staggering. Through the year, this business hub teems with trucks laden with fabric, businessmen from across the country, local wholesale traders and labour who help with transport and packing.

On July 1, though, when the Goods and Services Tax (GST) was introduced, Surat’s bustling markets went silent. Earlier, all stages of the textile industry other than yarn had been free of the tax net, but these were now brought into the GST regime at one stroke. The enormity of the task ahead, as well as the consequent loss due to taxes, has stunned and shattered textile traders.

The centuries-old textile sector is an integral part of India’s sociocultural fabric. Chiefly made up of small businesses, the textile trade in Surat is carried out through traditional methods such as long-term credit and consignments based on trust. The GST move appears to encourage vertical integration and is expected to shift the sector towards big industry, which seems to be the mission of the current government.

The immediate reaction of the textile traders was to go on strike. For three weeks, the markets in Surat shut down, leading to massive losses to traders. Tarachand Kasat, president of the GST Sangharsh Samiti, told Frontline : “We lost close to Rs.1.25 crore a day. More than 65,000 textile traders participated in the strike. Every stage in the chain will be taxed and therefore affected.”

In spite of the sizeable mobilisation within the textile community, the strike had a bleak outcome. Finance Minister Arun Jaitley refused to remove the tax altogether, saying it would break the input tax credit chain. However, the GST Council, which met on August 5, did roll back taxes on jobwork, reducing the percentage from 18 to 5. While this is a slight improvement, traders are nevertheless deeply disappointed as they believe they have been let down by a government which they helped bring to power. “Hamaribhul, kamal ka phool (our fault was [voting for] the lotus),” says Kasat. He says this will have repercussions in the Gujarat Assembly elections and, later, in the Lok Sabha elections.

For now, the textile traders seem to have accepted it as a fait accompli. “The festival season is upon us. Our orders are a third of what usually goes out during this period owing to the strike and because everyone in the industry is busy sorting out their paperwork,” says Gurumukh Kunjwani, president of the Millennium Market Traders Association.

“It is not as though we are against paying taxes or even GST; after all, we do pay income tax. As a sector that has hitherto not been taxed, all we are asking for is some time to put systems in place,” says Kunjwani. “Most of us are small businesses, and are not well versed in technology. We also have to hire professional accountants. These are added costs that will eat into our marginal profits. We estimate that about Rs.8 lakh will be added to our costs annually.” Most traders Frontline spoke to clarified that their protest was not against GST per se but the fact that they needed time to implement accounting and other processes.

According to Kasat, the textile industry was perhaps left out of the tax net because it was encouraged to develop and flourish under the old socialist policy of roti, kapdaaurmakaan (food, clothing and shelter) for all. He added that this industry not only provided clothing but was second only to the agricultural sector in providing employment. Across the country, there are thousands of textile mills producing cotton, blended and synthetic fibre. India is Asia’s largest producer of man-made fabric, but it currently faces stiff competition from China. “Caught between competitive markets and GST, this industry is going to dwindle and die. We predict that 25 per cent of the total 75,000 traders in Surat will shut down within a year,” says Kasat.

For an industry not used to taxes, the problem GST presents is that it taxes the entire supply chain. There are approximately 15 stages from yarn to a final product such as a saree. GST regulations tax every stage (see diagram). The GST Council to which traders appealed said that at best it could reduce taxes on jobwork such as printing, embroidery and packaging to 5 per cent but categorically stated that 18 per cent GST would remain for yarn, says Champalal Bothra, president of the Federation of Surat Textile Traders Association (FOSTTA).

Explaining the process, Bothra says that for the movement of every material in the jobwork, each person involved at every stage will have to do paperwork and pay GST on the product and also on labour charges. If the units doing jobwork are not GST-registered, the responsibility falls on the loom owner or the wholesale trader to pay GST under the Reverse Charge Mechanism (RCM). RCM is a method of collecting tax wherein the recipient of the product pays tax on the material and the service he buys from unregistered dealers. This was one of the factors that triggered the protest.

With 65 per cent in the chain being unorganised, the onus of paying taxes would therefore fall entirely on cloth manufacturers and traders. For instance, a small karigar (craftsman) who does the lacework for about Rs.10 a saree needs a GST number to pay tax, else the tax will have to be borne by the wholesale trader. The fact on the ground is that the karigar does not have the wherewithal for this kind of accounting, while the traders do not have the resources to bail him out.

According to Bothra, the man-made fibre sector comprises small businesses that work on marginal profits; GST will increase the cost of production, and subsequently profits will become almost insignificant. He explains: A synthetic saree costs Rs.70 to make from start to finish. These sarees are typically sold to distributors at Rs.80 or 100—the profits are barely 15 per cent. Adding 5 per cent at every stage raises the cost to Rs.150-200 per saree. This makes it unviable for not only the distributors, who will not pick up stock at the new price, but also the target market (synthetic sarees are worn mostly by the lower income group) who will not be able to afford it either.

Bothra says 50 per cent of their customers are from rural India, who prefer nylon sarees as they are affordable, durable and low-maintenance. “Don’t they realise that this product will only further affect consumers who always face one hardship or another?”

Pre-GST, the yarn manufacturer paid approximately an 18 per cent Value Added Tax (VAT) and excise duty, a cost that was incorporated into the yarn sold to the weaver. Post-GST, the weaver gets a credit of approximately 12 per cent for the input taxes (taxes on raw material, in this case yarn), which is an additional benefit. The only benefit of GST which will be seen in the long term is input tax credit.

However, a significant problem with input tax credit and GST is that Section 19 of the GST Act says that traders need to follow the procedure for sending goods out for jobwork in order to avail themselves of input tax credit. Jobwork such as embroidery and lacework can be done even in small homes and is a substantial source of income for a large number of women in the villages near Surat. The inability to move material for jobwork which is part of the regulations will not only cause an upheaval in a well-oiled system but also threaten the livelihoods of hundreds dependent on this work. “GST will help the so-called composite textile businesses such as Reliance and other big names. Every stage is processed in-house and therefore they can handle the tax situation more efficiently,” says Bothra. “Sadly, the BJP’s [Bharatiya Janata Party] policies benefit only big industry. It is part of their ideology. The small- and medium-scale sectors are being systematically wiped out.”

“This is an attempt to bring various unorganised sectors into the tax net,” says a Mumbai-based chartered accountant. The government declared that it wanted to plug the “tax leakage” occurring because of exempting small-scale industries (SSIs) and the unorganised sector. “While the intention is to curtail cash transactions and black money and show more accountability, sadly, too many people down the chain are adversely affected,” she says. “This sector could have been granted a stage-by-stage rollout.”

Bleak outlook

The Millennium Textile Market on Surat’s ring road is a six-storey structure with labyrinthine corridors that house as many as 6,500 shops. Wholesale traders, middlemen and daily wage labourers involved in packing, lifting and transporting sit among bales of fabric. Shop windows display sarees, salwar sets and lehengas in every possible shade and colour.

While the scene appears busy enough to an outsider, Nitin Kunjwani of Pallu Sarees says: “This is nothing. Normally, you will not be able to walk so fast through the lanes at this time. There are people from every State who come to procure fabric and sarees. We would sell 7,000 to 10,000 sarees a day. Now it has dwindled to a few dozen a day.”

Kunjwani says the sudden introduction of GST is tantamount to sheer harassment, not to mention the losses incurred. Since a sizeable number of traders and job workers need to get their GST numbers registered first, nothing can be done until then. One of the traders, Amit Rai, has decided to close his shop. “I need to get rid of the old stock and then I will shut down. It has become too difficult. Eighty per cent of our workers have left. If we are lucky, we get one customer a day who may or may not buy sarees. I am unable to sustain the business which had already begun to slow down a few years ago owing to Chinese imports. Instead of imposing taxes on us, there should be anti-dumping duty on Chinese imports.” Surat is home to seven lakh looms, 1.10 lakh embroidery machines and nine industrial estates with thousands of textile weaving, dyeing and printing mills. The textile hub produces four crore metres of fabric a day. The daily turnover is estimated at Rs.125 crore, according to FOSTTA.

There is also a looming fear among the workers that jobs will disappear. FOSTTA says there are about 14 lakh people working in the industry. “Earlier, agents would come and drop 50-60 sarees for us to do small sequins or piping work. Now we get 10 or 20 if we are lucky,” says Vimlaben, who lives in a shanty about 10 kilometres from the city. “Busloads of fabric would come to our colony. We do not see those anymore.” Earlier, Vimlaben would earn Rs.200 to 300 a day. She says she has barely earned Rs.50 to 60 a day in the past two months, which is why she has come to the market to earn a wage, packing sarees.

The textile workers of Surat are among the main providers of saffron fabric for several BJP election campaigns. “This is what they do to us in return. It is unacceptable,” rues Mahesh Ramodiya, owner of Siddhi Sarees.

Such was the might of the Surat textile industry that when a Central Value Added Tax (CENVAT) was imposed in April 2003, traders went on strike and in July 2004 the government rolled back the tax on power looms. Except for that brief period, the textiles industry has been largely exempt from taxation. This time, though, it does not seem likely they will be able to escape the net.