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How Does GST Impact Manufacturing Sector In India?

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The major economic drive for the nation and for developing economies across the world has been the manufacturing sector in India. However, its performance has been uninspiring following the fact of it being plagued by a complex tax structure, improper infrastructure and bureaucracy.

Amounting to 16% of manufacturing shares in GDP, India’s manufacturing sector has remained stagnant for the last two decades. With the implementation of the GST on the manufacturing sector, it will help the economy to develop a shift from an agricultural economy to a more complex manufacturing and service based economy as a whole.

With constant efforts by the Government to make India a manufacturing hub will initiate the rise of the Goods and service tax that is said to trigger a transformational shift from a complex pre-existing indirect tax system to a simpler unified indirect tax structure across the country. One major advantage will constitute a change in cascading effect of reducing taxes, leading to manufacturing collaboration in the country.

The GST regime will foster an impact on growth and opportunities for businesses in India and thereby compel organisations realign production cost, production time, supply chain, logistics etc. by changing the indirect tax structure.

Impact Of GST On Manufacturing Sector

Valuation of MRP under GST

At present, pre-packaged products for retail consumption are subjected to excise duty based on ex-factory transaction value. The MRP based value of a product is much higher than the ex- factory transaction value which in turn leads to a higher excise duty. This causes a higher cost burden for the consumers.

However, GST is payable by the manufacturers at the transaction value and is good for all subsequent resellers till the final consumer. Similarly, the unnecessary tax burden of the MRP will decay terming it irrelevant.

Reduces the Cost of Production

The manufacturing sector is a competitive industry and thereby, reducing the cost of production will help in creating an incremental value for customers which remains a challenge for every business today. But, the GST will serve as a benefit by bringing about a reduction in tax slabs which will lead to a lower cost of production. One major defect of the current indirect tax structure is the non-availability of tax credit of central or Union taxes over State taxes and vice-versa. This will be eliminated by allowing an unrestricted tax credit under the GST.

Area-based Exemptions

As the GST will unify the nation with a common unified market, the current area-based exemptions will become irrelevant. However, since the finalised GST Act is not in hands yet, those who have already enrolled for this incentive may be at a loss.

Problem-free Supply of Goods

State-border check points and location-based tax compliance which determine the flow of goods into a state have negatively impacted the overall production and logistics time for roughly 60% of trucks transit time. Such unproductive transit hours with regulatory weaknesses reduce the efficiency of Indian manufacturers compared to that of their international counterparts. The GST will unify the Indian market and assist in a smooth flow of goods within the country. In addition, the border checkpoints will reduce compliance scrutiny which will also reduce transport problems, thereby ensuring a hassle-free supply of goods into a state.

Restructuring the Supply Chain

An additional 1% tax on supply goods, supply of goods and services to oneself, and input credit tax on inter-state sale will drive changes in restructuring the supply chain. According to The Constitution Act, 2015, the word ‘supply’ does not differentiate between ‘Supply to oneself’, and ‘supply from one person to another’.

However, the select committee has specifically stated that the additional tax should only be applicable in the case of consideration, wherein, supply to self should not be covered under its ambit. Moreover, the clarity regarding the word ‘supply’ is removed or exempted from the GST Act, which is yet to be proposed by the GST Council. If so there is a shift, it will warrant a redrawing of warehouse strategy to improve organisational profits.

The availability of input tax credit on Inter-State sale of goods and services will lead to warehouse re-engineering that can remove an extra level of warehousing in the supply chain, and thereby leading to higher cost benefits.

Rate of GST

The rate of the GST will be perceived as a beneficial indirect taxation system only if the tax rates as proposed by the government do no exceed the revenue-neutral rates’ (RNR) expectation of the industry. In case the GST rate is higher than 20-22%, it will negate all positive aspects of the new GST.

Irrespective of the outcome of GST, every customer, paying or receiving indirect taxes, is hoping for a lower RNR rate from the Government which will avoid inflation on product prices. The implementation of GST seems to have a far reaching impact on the manufacturing sector of India.

The manufacturing sector is a boom to the rise of the Indian economy and the implementation of the GST will reduce the overall cascading effect of taxes primarily on the post-manufacturing process of the supply chain which will result in low costs for customers.

How To Enable Yourself With GST?

If you need to register for GST, the next roll out is on the 25th of June, and GST comes into full effect on the 1st of July so log on and register as soon as possible. You can choose from our GST services and let us help you in order to make you GST ready!

21 Jun, 17

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