Ludhiana: Thousands of small-scale manufacturers in the bicycle, sewing machine, and carton sectors are grappling with a severe liquidity crisis triggered by a flawed inverted duty structure. Despite government assurances of GST refunds within 30 days, local units report that 13% of their working capital remains locked up for months, compelling many small factories to shut down every 10 to 15 days.
Root Cause of the Crisis
The problem stems from the fact that manufacturers purchase raw materials such as pipes, paint, and brass at an 18% GST rate, but sell finished goods at only 5%. This creates a 13% tax gap that can only be recovered through government refunds. Industrialists allege that by withholding these funds for extended periods, the government is effectively using the industry's capital as interest-free loans. Consequently, units struggle to pay wages or procure fresh raw materials.
Impact on Small Entrepreneurs
Industry representative Avtar Singh highlighted that small entrepreneurs, often operating with capital as low as Rs 30 lakh, cannot survive six-month delays. He warned that the sewing machine sector, already battling cheap Chinese imports, is heading toward a sunset if these financial and research and development hurdles are not addressed.
Shift Toward Imports and Informal Trade
The current structure also makes imports more attractive than local manufacturing. Importers pay 5% Integrated GST and sell at 5%, completely avoiding the refund trap. Industrialists cautioned that prolonged delays are encouraging informal trade, as some units have begun avoiding billing altogether to prevent their funds from getting stuck in the GST system.
