Impact of GST on Manufacturers – Part I

Last updated on July 21st, 2017 at 03:07 pm

The “Make in India” campaign has provided a huge boost to India’s position on the world map as a manufacturing hub. According to Deloitte, India is expected to become the 5th largest manufacturing country in the world by the end of 2020.

But more importantly for us, it promises to do wonders for the manufacturing sector – which has seen a stagnant phase in the last 2 decades and currently contributes to 16% of our GDP, as per IBEF. And that, surely means good news for our manufacturers.

But is only a campaign going to turn things overnight? Probably not. While the government has a full arsenal of ideas, innovations, and strategies on how to make “Make in India” happen – it has already launched its first weapon – GST.

So, if you are a manufacturer, is GST going to be good or bad for you? Are there things you will need to re-think, as you get ready to embrace GST from 1st July? Let’s explore.

Positive impact

Reduced Cost of Production

Under the present indirect tax regime, a manufacturer cannot claim tax credit on the central sales tax paid on inter-state procurements. Similarly, there are other non-creditable taxes like Octroi, local body taxes, entry tax etc. All this adds to the cost of production.

This problem continues into the post manufacturing stage, since taxes are cascaded. Similar to the manufacturer – distributors, dealers and retailers too are unable to claim tax credit on their input – ultimately increasing the cost of goods for the end consumer. This has a direct effect on the competitiveness of goods manufactured in India versus goods which are imported, and end up hitting the Indian manufacturer indirectly.

One of the greatest boons of GST to the country as a whole is – reduction of the cascading effects of taxes. Tax set-offs are permitted both for goods and services at the production stage – reducing the effective indirect tax and maintaining a steady credit flow for the manufacturer. Not just that – as a manufacturer, one need not take the tension of deciding where to procure from – with GST coming into the picture, a manufacturer can claim input tax credit irrespective of where he sources from – local, inter-state or import (with the sole exception of Basic Customs Duty, which will continue to be levied on imports).

End of multiple valuation methods

Currently, manufactured goods are subject to excise duty – which currently is being calculated via various methods. In some cases – Ad Valorem (on transaction value) is adopted; in some cases Ad Quantum (on quantity) is adopted; in some cases a combination of both. Most of the manufactured goods follow MRP valuation, wherein the duty is calculated in a specified percentage of maximum retail price. What adds to the complication is that the MRP valuation rules themselves are extremely chaotic. Different rules exist for packaged goods sold to individuals vs. packaged goods sold to institutions vs. packaged goods sold as combo-packs or promotional packs.

Under the GST regime however, the GST payable by the manufacturer will be calculated based on the transaction value. This will absorb the complexity of multiple valuation techniques and make life simple for a manufacturer. The only possible exception would be the cess valuation for 2 products, namely – coal, the maximum cess limit for which is INR 400/tonne; and tobacco, the maximum cess limit for which is INR 4170/thousand sticks.

State Wise Registration vs. Factory wise Registration

Earlier, a manufacturer had to take multiple tax registration for multiple factories, even though they were present in the same locality or state. For e.g. – a manufacturer having 10 factories in Karnataka itself, would have to take 10 separate registrations. In short, this was a compliance nightmare for any manufacturer who dreamt big. But in GST regime, since the consideration for taxable event is supply, the same manufacturer can now go for a single registration for all 10 units within a single state. So, no more separate registration for the same taxable manufacturer in a State.

Supply chain restructuring based on economic factors

In the current regime, businesses and supply chains have been typically structured based on the convenience of paying tax.

With GST coming in, a manufacturer will finally be able to concentrate on what is important – business efficiency – and warehousing decisions can be made on operational and economic factors such as costs, locational advantages, proximity to key customers etc. In fact, now that manufacturers can claim input tax credit on inter-state supply of goods and service, we might as well see the entire level of warehouses being wiped out from the supply chain – leading to greater cost benefits.

Reduction of classification disputes

Currently, due to varying rates of excise duty and VAT on different products, as well as several exemptions provided under the excise and VAT legislations, classification disputes are a regular cause for litigation under both central excise and VAT, especially for the manufacturing sector. With the inception of GST – which operates on a simplified rate structure and minimization of exemptions – there will be a significant reduction of disputes regarding classification of products.

No Dual Control

In the current regime, a manufacturer is subjected to dual control – since he is typically assessed by the Centre for Excise and by the State for VAT. In the GST era too, since a manufacturer will be liable to pay both CGST and SGST – there was a genuine concern that a manufacturer will continue to be assessed dually. This aspect of dual control has been deeply discussed and debated by both states and centres. However, the government reached a consensus in January 2017 to avoid dual control. Under the proposed GST regime, 90% of all assesses with a turnover of INR 1.5 crore or less will be assessed for scrutiny and audit by state authorities, the remaining 10% by the Centre. Above that limit, Centre and states will assess in a 50:50 ratio. This step will surely go a long way in adequately protecting the interest of small traders, and making the GST transition a smooth and effective one.

Overall, GST bodes well for a manufacturer in more ways than one – the most significant being the increased ease of doing business and reduced costs on several fronts. But, could there be aspects to watch out for as well? More about that in our next blog on this topic.

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Pugal T & Pramit Pratim Ghosh

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