The latest notification from the Revenue Department, Ministry of Finance, mandating reverse charge mechanism (RCM) under the Goods and Services Tax (GST) has drawn flak from cotton stakeholders, especailly ginners and traders.

The Centre had earlier deferred till March 31, 2018, the implementation of RCM under the GST regime, but on Tuesday it issued a notification that the purchaser of cotton from farmers will have to pay the GST, thereby affecting ginners and cotton traders.

Cotton, under headings 5201 and 5203, falls in the 5 per cent tax slab. But as farmers are not liable to pay tax and not registered under GST, buyers of raw cotton will be required to pay the tax on reverse charge basis.

On Wednesday, ginners and cotton trade leaders met PD Vaghela, Commissioner of Commercial Tax, Gujarat. They are optimistic that an interim solution will be worked out.

“This is an issue that only the GST Council can address. We are told that the next GST Council meeting is scheduled for January. But we can’t wait that long... so the Commissioner has asked for some time to work out an interim solution,” said Bharat Wala, President of the Saurashtra Ginners’ Association, who was a part of the 30-member delegation.

Of the over 4,300 ginning units in the country, about 1,300 are in Gujarat, mainly in Saurashtra and North Gujarat.

“This is an ill-timed decision. The ginning industry is facing its worst period and exporters too are finding it tough. Farmers are harvesting a bumper crop this year. On the one hand, MSP operations are on, and on the other, the government is discouraging ginners from making purchases by issuing notification like this, which will block their working capital,” said Arun Sekhsaria, a cotton trader in Mumbai.

Cotton crop in India is estimated to touch 40 million bales (each of 170 kg). Following the RCM decision, ginners are more willing to sell the fibre to the domestic market, where they will get full tax refund than to sell it to exporters, who are liable to pay GST at 0.1 per cent only.

“This is a catch-22 situation for ginners and exporters. But the ultimate loser will be the farmer because in a bid to compensate the shrinkage in his working capital, the ginner will pay farmers less,” added Sekhsaria.

“This is the final blow for the near-dead ginning industry. The blockage of funds will reduce our working capital and prompt us to either reduce purchases or borrow at higher interest rates from banks,” said Rajnibhai Gandhi, a ginner in Bodeli near Chhota Udepur in Gujarat.

Manubhai Agarwal, a cotton trader from Central Gujarat, said that looking at the current weak market scenario, it takes longer than 90 days to clear the stock. “We have to pay the GST within 10 days of purchase. But we will get the refund or input tax credit only after we sell the stock. Buying is as it is sluggish, and in this situation, our working capital will remain blocked for a longer period,” he said.

Ginners are talking of a strike if the issue is not resolved; a decision on ths course of action will be taken after November 20.

What is a reverse charge mechanism

Under the normal GST payment mechanism, a supplier is a registered person, who sells goods/services to a buyer or receiver.

This receiver pays the supplier for the goods/services plus the GST payable on it. In turn, the supplier deposits the tax with the government, through the GST Network.

But in the Reverse Charge Mechanism, the supplier is not liable to pay any tax. Hence, the receiver, besides paying the supplier for the goods/service, separately pays the government the applicable tax. - RV

Related Topics
comment COMMENT NOW