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Will GST dry up Dry Cleaning Industry?

With effect from June 30, 2017, the Cleaning Industry has been covered nationally by the new Goods and Service Tax. While suppliers of cleaning equipment like vacuum cleaners are affected on one hand, as these are put under luxury items, the dry-cleaning companies are unhappy on the other hand with companies with a turnover of `20 lakhs coming under the GST slab of 18%. Yet laundry experts –Dalbir Singh, owner of Quick Dry Cleaners, Chandigarh, Akash Dharamsey, Director of ADD Laundry Concepts, Mumbai and Nalin Agarwal, Founder of the Laundry Bag, Pune, feel that laundry business has to grow, as clean linen and garments are part of our Clean India mission.

What are the problems you see facing the Laundry Industry, in the light of GST being recently introduced?

Akash Dharamsey: I agree that introduction of GST is surrounded by anxiety since we have limited knowledge about how it will pan out, but it is the same reaction when we are faced with a situation result of which is unknown.

I am sure the present anxiousness will die down in due time. Hygienic Laundry & Dry Cleaning is no longer a luxury; it is a basic human necessity. This industry has to grow at a much faster pace than before.

Akash Dharamsey

Even though it may seem unfair that exempt businesses may have advantage of lesser price; on the flip side, it also means that the business cannot claim credit on GST paid towards purchases.

The question may stem from a retail dry-cleaning/laundry business (B2C) perspective rather than the entire laundry industry which also includes institutional launderers who provide B2B services. Yes, the `20 lakh tax slab exemption seems to be beneficial to industry colleagues who will be exempt since price inclusive of tax to customer may be higher. However, from my understanding the additional burden on the end customer is only about 2.50%, because pre-GST the non-exempt fraternity was paying 15.50% as service tax. Hence, it can be presumed that a customer will not mind paying `1.25 additionally on a `50 charge per garment, provided the focus is on better service.

Also, it must be taken into account that the dry-cleaner/launderer registered under GST can claim credit of GST paid which should essentially work to their advantage.

Institutional launderers above the exemption limit catering to companies and businesses will levy GST to their clients who in turn will claim GST credit pertaining to their line of business.

GST may however impact advent of laundry start-ups since they have no avenue to claim GST paid on purchase of equipment unless they register the business under GST.

The mid-sized players are paying taxes, but will lose customers. This is like giving a penalty for generating revenue. I spoke to laundry owners from Bhatinda, Delhi and Kanpur who are falling in this slab. We don’t have even 20 players from the drycleaning sector from Punjab, among those that had service tax before.

Dalbir Singh

Dalbir Singh: In fact, small dry cleaners from Delhi and nearby areas are not able to do even `10 lakhs worth of business these days while previously they could do business of `20 lakhs. Nobody seems to have more than `40 to 50 lakhs worth of business.

Outfits that are below the `20 lakh income slab have got GST exemption from the government. However, this also means that those who are above the `20 lakh income slab have to face the competition with 18% tax rate. The overhead has also increased as they have to appoint an accountant and cover many other expenses. The system is becoming very difficult, as every year, three to four electronic tax returns have to be filed. Smaller players have got exemption from tax under the new rule, but the bigger setups will face problems.

In our case, those who have fallen below the `20-lakh tax slab have become our competitors. So, an outfit doing business worth `30 lakhs will not be able to compete, as the customer will go to the company offering lower rates. In this way, such a business will be driven to fall in the category of the `20 lakhs bracket. Moreover, when cash discount is given, payment is made on the spot. Here the small player is at an advantage by getting direct 18% margin.

At the time of registration, we have all come under nine to ten lakhs slabs, as according to our calculations at that time, we were averaging three thousand per day, so on average we were getting `10 lakhs. Now those who do not have three thousand worth of business cannot survive here. They are forced to remain below the `10 lakh slab.

The dry cleaners want a little improvement in taxation. If we get a composition scheme, then we will definitely benefit. It could be something like that is given to the textile industry or gems & jewellery industry. They get a rebate, after which they have to pay five per cent tax and then do outsourcing. The material which is brought in is subject to tax which is not refundable in this case.

It is important to see that situation does not turn out bleak as survival of the laundry industry is important to the country’s overall vision of cleanliness and hygiene.

Nalin Agarwal: We need to understand that the laundry industry has to be divided into various categories, but to start with let us bifurcate it into two parts: Organised Players & Unorganised Players.

Unorganised players are the small dhobi shops and unregistered entities which were never in the tax bracket so it is nothing new for them as they anyway never had to pay taxes. Their position remains unchanged in the competition pyramid. But we need to understand one important thing that “Not liable to CHARGE GST” does not mean “Not liable to PAY GST”. They might not be charging the GST from their customers but will end up paying GST on the equipment and supplies for which no Input Credit can be earned, leading to costly supplies.

Organised players are those registered entities which are either outsourcing good volumes or providing laundry & dry cleaning services through big and small setups. Now setups like these can again be bifurcated into Small, Medium & Large service providers. For these entities the games has changed, but still has an overall good impact. I agree that compliance will be an issue, but most of these players are tech savvy and will learn the tricks of the system in no time. Even if they are not technically inclined, most of us use the services of professional Chartered Accountants who can help us with it.

These are the players who invest in machinery and to my knowledge the new tax structure for such equipment will not only improve the margins but also speed up business expansion. Earlier the imported equipment were being taxed at an effective rate of 29% (Custom Duty 10% + Custom Education Cess 3% + CVD 12.5% + SAD 4%) for all kind of machinery (washers, dryers, ironers, etc.) out of which only the CVD could be earned back through Input Credit. But now, not only are the tax brackets lower, but also other equipment is cheaper (Washers, Extractors @ 28% and all the other equipment @ 18%). Another point is that the Input Credit can be earned back on the entire tax amount payable.

This will not only lower the cost and improve the margins but also make Indian companies manufacturing equipment more competitive, which in the long run will benefit the industry.

GST: Impact on Cleaning Industry Service Providers

Pankaj Kannaujiya, the founder of Parametro Advisory LLP and an associate member of the Institute of Cost Accountants gives here his understanding of the impact of GST on the service providers.

GST’s effect on various industries will vary from each other; differentiation will come in depending on whether the industry deals with manufacturing or providing Services or in retailing.

In present indirect tax system, there is a service tax which are applicable on cleaning service provider (earlier it was only on dry cleaning services before negative list) subject to annual turnover of Rs.10 lakhs (small service provider exemption). But the Service provider could not take the Input Tax Credit of taxes which are paid by them on their inputs / consumables like VAT on intrastate purchase, CST on interstate purchase, Packing Materials, etc. Credit of Service Tax and Excise duty is available, if any paid by them on inputs or capital goods.

We can analyse the cost of Input which is used by cleaning service provider before & after GST implementation.

Present Tax System

In present indirect tax regime, there are many taxes which directly & indirectly affect the cleaning industry for example Input materials and consumable attracts excise duty, VAT, sales tax etc & Output services attract service tax. Input Tax credit of Excise duty against Service Tax is easily available but in most of cases cleaning industries purchase material / consumables from traders not from manufactures, so excise duty became a part of material cost & above the said cost VAT is separately showing in invoices but input tax credit of VAT paid on materials / consumables is not available against Service Tax liability of service provider.

Thus, indirect tax paid on input material & consumables are added in product cost & thus tax on tax i.e. cascading effect continue.

With GST

In GST regime, only one tax will be levied on Goods as well as Services, i.e. Goods & Service Tax (GST). So, if we are engaged in trading or manufacturing of goods or providing any services, we have to charge only GST. (GST rate may vary from goods & services) In GST, the seamless flow of Input Tax Credit is available in respect of the activities. For example, traders are purchasing materials from manufacturers, then manufactures are charged GST (CGST /SGST / IGST as the case may be) on product price; the full GST credit are available to traders and when Service Provider purchases from traders, traders will issue the invoice after charging appropriate GST on products & finally service provider will raise the invoice of services after charging GST to clients. Thus, under GST, input tax credit of GST will pass on from manufactures to traders, traders to service provider.

ITC: Input Tax Credit

Going by this calculation, we can assume that GST will boost the Service providers i.e. Laundry Service Providers and House Keeping functions. We have taken only chemical portion for our calculation, because it often forms the major component in costing by industries. Other GST ITC will also be available for packing materials and administration expenses which attract GST.

Kannaujiya runs a family business of Laundry & Dry cleaning in Surat in the name of Shakti Washing Co. & Prakash Laundry & Dry cleaners. In 2016, he launched Surat’s First Laundry & Dry-cleaning app Mr. Laundrywala. Above all, he reads Clean India Journal every month

Do you see this as a short-term hitch which will be beneficial to the industry in the long term? Is there any concerted effort to lobby the government towards policy reform, and if so, which sections of the industry are most vocal?

Akash Dharamsey: As explained earlier, the implementation of GST is a short term hitch.

The tax structure and policy require industry engagement at a very different level; however, categorization of laundry/dry-cleaning business must be re-looked at for the overall growth of the industry.

Yes there are requests to present to the Government an encompassing tax and policy reform related to the industry. The B2C dry-cleaners and launderers in the mid-segment are most vocal.

It is important that members from the laundry fraternity come together under one umbrella of the Laundry and Dry Cleaning Association of India to discuss and debate a positive way forward.

Nalin Agarwal: It will take a little time to get accustomed to the new tax structure, its calculations and its compliances, but that cannot be a reason not to be optimistic. In the long term it will be beneficial for the industry. The only basic problem that can be fixed is that the taxes can be reduced further. Who does not want a lower tax rate? Or to put it correctly, who wants to pay higher taxes?

I agree that tax burden on our customer will increase from 15% to 18% but it is also a fact our customers don’t mind paying the extra bucks if the service is good. So it is upon us to improve our quality and keep our clientele happy.

Nalin Agarwal

Finally, your overall view on the future outlook for the laundry industry

Akash Dharamsey: Clean and hygienic Laundry and Dry Cleaning is no longer a luxury; it is a basic human necessity. The Swachh Bharat Abhiyan resonates with this necessity. This industry will continue to grow at a much faster pace than before.

Nalin Agarwal: Personally speaking, I am bullish about the entire change. As I said earlier, the margins will improve because of Input Credit on the entire range of taxes that are going to be paid. This was not the case in the earlier tax regime. Besides the CVD & Service Tax, nothing earned input credit. The benefit of this can either be used to improve the margins or it can be passed on to the customers to gain more market. In totality, GST will be beneficial for our industry.

Ravi Chandran

With effect from June 30, 2017, the Cleaning Industry has been covered nationally by the new Goods and Service Tax. While suppliers of cleaning equipment like vacuum cleaners are affected on one hand, as these are put under luxury items, the dry-cleaning companies are unhappy on the other hand with companies with a turnover of `20 lakhs coming under the GST slab of 18%. Yet laundry experts –Dalbir Singh, owner of Quick Dry Cleaners, Chandigarh, Akash Dharamsey, Director of ADD Laundry Concepts, Mumbai and Nalin Agarwal, Founder of the Laundry Bag, Pune, feel that laundry business has to…

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