Sectorial Impact

How GST will affect Manufacturing Industry in India

Dated 15th March, 2017

How GST will affect Manufacturing Industry in IndiaManufacturing industry in India is suffering from the stagnant growth due to the current complex tax structure. Manufacturing Industry has been a growth driver for various developed countries but in India this sector has always been a backward performer. This sector in India has been cursed by the inadequate infrastructure and bureaucracy, which is hindering the performance of this sector on the global scale.

The government knows the importance of this sector and is therefore taking several steps for the growth of the manufacturing sector. The new GST regime is also a step to make India a manufacturing hub at the global level which would require several strategic reforms. The GST Regime been a modern tax reform will have a far reaching impact on business avenues, cost of production, supply chain, distribution model, compliance, working capital etc. The various areas of impact are as follows:

Reduction in tax cascading

The manufacturing sector is very competitive industry and reducing the cost of production while creating the incremental value for customers is a challenge for every industry. The GST Regime will be beneficial as reduction in tax cascading will lead to reduction in the cost of production. Under the current indirect tax regime the input tax credit of the central taxes are not allowed to be set off with the state taxes or vice versa. This often leads to a situation where manufacturers are unpaid to claim excess credit of central or state levies. Even the Central Sales Taxes paid on inter-state procurements are not creditable and becomes the cost of the organization. This leads to an increase in the cost of goods, ultimately affecting the competitiveness of Indian manufactured goods both for domestic consumption and imports. All these issues are addressed in the Model GST Law, which permits seamless input tax credit across the production value chain for both goods and services.

State Incentives

Various states incentives are generally offered in the form of tariff incentives like lower tax rates, refund or deferment of taxes, etc. and non- tariff incentives like economical land lease terms, lower electricity duty, etc. In GST regime, there is no mention of the future of current state incentives in the Model GST Law.

In the current tax regime the producer state is credited with central sales tax on inter-state sales. GST is a consumption based tax so all the taxes will be earned by the state in which the goods and/ or services are consumed. Producer states will have a lower financial incentive to offer such concessions, as GST will only be credited to the state where the supplies are consumed. This would lead to a loss of revenue for the producer states and therefore such states may not be in a financial position to continue offering such incentives, even though there may be other compelling reasons such as generation of labour, improvement of infrastructure, market creation etc.  However, it seems likely that future incentives may only be non-tariff based.

Area based incentives

Manufacturing units enjoy exemption of taxes based on their location in specified backward areas, capital investment etc.  There is no clarity under the Model GST Law on the treatment of such area based exemptions. Given this uncertainty, companies should make a representation to the Government for appropriate compensation for the unutilized portion of such incentives.

Distribution Model Restructuring

Under the current regime the organisation are operating on state warehouse model in order to avoid the Central Sales Tax which is chargeable in case of inter-state movement of goods and is not creditable and gets added to the cost of the product which enhances the cost of the production. In the GST regime the organisation can operate on the single warehouse system this may potentially increase concentration of business in centrally located areas to facilitate the smooth transferring of the goods from one state to another. As the IGST which would be payable on the interstate transfer of goods would be available as credit. Thereby, reducing the cost of the product and making it cost competitive.

Free Supplies

Currently, free supplies are not taxed. Under GST supply of goods between persons without consideration is deemed to be a “supply”. Transaction value would be value of goods of like kind and quality or the cost of sales. Accordingly, free samples may be subject to GST, leading to increase in overall costs.

Discounts

The Model GST Law stipulates that post supply discounts are to be excluded from the transaction value, provided such discounts are known at or before the time of supply of goods and are linked to the invoices for such supply.  Companies may need to do analysis of the existing post supply discounts / incentive schemes where the quantum of discount is not known at the supply stage. 

Increased compliance requirements

GST demands businesses to set-up mechanism for meeting the compliance requirements. Increased compliance will reduce loopholes in the tax framework but increase the cost initially for businesses. Once businesses adapt themselves to meet the requirements of GST, compliance costs will come down drastically.

Minimization of the Classification Issues

In the current indirect tax regime there are numerous issues on classification of goods due to separate rates on different goods and exemptions on certain goods. But in the GST Regime there shall be minimization of classification issues due to uniform rate and less expected exemptions.

Overall impact on Stock Transfer

With the shift of taxable event from sales to supply consequentially stock transfers under GST would be taxed. Under the current regime stock transfers are not taxed while GST would be applicable on stock transfers considering it as supplies. Though the Input Tax Credit would be available for set off but this may block the working capital for time being thereby interrupting the cash flow.

GST Rate

The GST Regime may be perceived as a good indirect taxation system only if the tax rates proposed by the government do not exceed the revenue neutral rate (RNR) expectation of the industry. If the GST rate is higher than expected it will adversely affect the industry.