Countries which are developing are economically sustained in a major way by the manufacturing sector of the particular country. India presently is a way behind in this sector but catching up. The topographical and the demographical position of India are promising but the country has not been able to take advantage of this benefits. The manufacturing sector in India has been beleaguered by the multifaceted tax structure, insufficient infrastructure and administration though it has the capability and resources to achieve a lot on a global platform. India’s manufacturing sector has been almost sluggish for almost 20 years and has only contributed merely 16% to the GDP.
Foreign Direct Investments which would result with the GST implementation can revive India’s manufacturing sector. The “Make in India” program was launched to make India a manufacturing center. The program provides inverted duty structure as well as procedural relaxations.
GST could lead to reduction in costs and would make export much more competitive from India. To calculate the impact of the GST on business, business strategies have to be systematically evaluated.
Some areas - Impact of GST on Manufacturing Industry
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State incentives
According to the incentives proposed by the states under the increase in investment policies it holds, companies have already outlined their investment options. These inducements are generally in the form of tariff incentives (lesser taxes rates, refund of taxes etc.) and non-tariff incentives (lesser electricity bill etc). Under the proposal the freedom given to the states would be shortened to gain uniformity. Some businesses may have to redesign their strategies who have chalked them up in view of the earlier incentives about which nothing is mentioned in the GST.
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Area based incentives
The production units located in backward regions enjoy tax exemption feature. But there is no such exemption in the List released on 19/20th May 2017. Hopefully the policy would be unveiled soon.
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Classification
GST was expected to have very few rates. In central excise it had actually come down drastically on rationalised approach. The GST list released indicates that the days of classification disputes is back in full scale with a plethora of rates applicable for same product – Ex. - 4 rates for milk and milk products. Manufacturers who are intermediaries may choose to err on the side of the higher rate and those supplying to the final consumer may have many issues.
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Increased working capital
All manufacturing sectors require capital and would therefore be affected by any impact on it. In the current scheme of taxation taxes are not to be levied on stock transfers. But under the GST act stock transfer would be taxed as they would be considered as supplies.. This would have a major impact on the liquid cash flow of the companies. They could have to change their strategies regarding cash flow to lessen its impact. Whether depots, branches are required is an important questions to be answered for such manufacturers.
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Free supplies
Under the present acts free supply of goods and services would be VAT free. Special kind of transactions would be considered as supplies and hence would be subjected to GST. Therefore this would lead to increase in overall costs of free samples which are subject to GST.
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Discounts
After-supply discounts would now be excluded from the transaction value until such discounts are known at or before the time of the supply of goods and services. This is postulated the
Model GST. Those who are still running under the old scheme of things are now required to evaluate the discount schemes where the amount of the discount is not known at the supply stage. Ex: volume based discounts.
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Valuation of self-supplies
Stock transfers and branch transfers which come under self-supplies are to be valued reasonably as the credit of the same is available on the other side. The valuation rules for supplies in certain circumstances is based on the open market value which maybe difficult to arrive at and could lead to disputes. MRP would no longer remain.
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Cheaper production
All businesses face the task of lowering down the cost of production and simultaneously maintain the satisfaction of the consumer. This is why manufacturing industry is a very competitive industry. Therefore the GST would lead to the reduction in cost of production because the GST reduces the tax increment. The GST program should have allowed uninterrupted tax credit by removing the old indirect tax rule of no getting any tax credit of the central taxes over state taxes and vice versa.
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Free supply of goods
40% of the trucks travel time gets affected by the state-border check points where there is always harassment about the products that are to be delivered, the region based tax levied on them which altogether hampers the production process. These kinds of disorders reduce the proficiency and skill of the Indian entrepreneurs as compared to international ones. GST could help toward efficient transportation.
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Supply chain restructuring
Supply chain restructuring may be necessary for some products. There could be a major change in warehouse functioning to increase their profits if this change takes place.
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Increased compliance requirement
GST has also another side to it other than adding profits. The present compliances of filing returns location wise for services and matching of credit and bifurcation of credit into used for business/ non business. Used for taxable and otherwise would add significantly to compliance cost.
. GST Rate
The rates in GST have substantially crossed the 18% limitation which was discussed last year for several commodities. The revenue zeal is apparent in trying to extract high taxes. This would come with the resistance for higher rates by increase in the parallel economy. Moderate rates seen in the last decade seem to have been given a go bye. Unfortunate that goods central tax policies are being reversed.
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Reduction of cascading taxes
The producers are able to cut off most of the input taxes which are associated with the production under the present indirect tax scheme. But the central sales tax cannot be cut off against the state taxes and vice versa. Hence the manufacturers’ are inconvenienced because they are unable to set the additional credit of central or state taxes. If the company pays central sales tax on inter-state purchases then it goes into the cost of the company and are hence not credible.
The cascading of taxes after the production has been completed is a major serious issue. The sellers and resellers have to give taxes on the inputs which are not creditable. Therefore the cost of the goods and services increases. This leads to increase in competition in the Indian market.
GST includes few solution to the above mentioned problems. It allows producers to set off taxes across production value-chain. However many restrictions form the old laws have unfortunately been carried forward. Inspite of that the changes would reduce overall cost of production of goods and bring about a reduction in the cascading of taxes.
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Exclusion of petroleum from GST
Petroleum crude, motor spirit, high speed diesel, natural gas, aviation turbine fuel are the five petroleum products on which the central government would continue to levy excise duty while on the other hand the state governments would continue to impose VAT.
Credit of excise duty levied on particular petroleum is now accessible. Elimination of petroleum products from the GST would increase the production cost. It is because of the fact that under the GST scheme the excise duty levied on such products would not be creditable. Common petroleum products are used for various production processes for the manufacture of goods which need to be distributed by transportation which requires petrol.
Hence certain industries which require petroleum products as their main input would get affected by the exclusion of petroleum from the General Sales Tax Scheme.
With the advent of the GST the manufacturing sector would profit considerably. The reduction of cascading of taxes as well as the supply chain restructuring should add to the profits and make them more competitive in the export markets.
How to Do GST Impact Study?
The information in idtc.icai.org available in this regard :
- GST Impact Study Program in articles section
- GST Impact study – how to do Video ( Model law)
- GST Impact study on real estate & manufacturing ( Revised Model law)
- Few articles on Impact study of some sectors in articles section.
- Few articles on sectors in the GST newsletter.
The net is also providing many other resources for the learner. The best way to learn is to take up an assignment using the above program and start off. After 2 jobs one would get a hand and be able to contribute too.
For any queries mail at [email protected] or [email protected]