Impact of GST on Manufacturers – Part 2

Last updated on July 21st, 2017 at 04:50 pm

In our last blog on this topic, we discussed about some of the positive impacts of GST on the manufacturers across our country. While the core benefits do stand out in terms of ease of doing business, and decreased costs on several fronts, there are certain aspects of Goods and Service Tax which may not be conducive to the manufacturing sector. Let’s have a look.

Negative Impact

Reduced working capital

Under the current taxation regime, stock transfers are not subject to tax, provided Form F is furnished. Input VAT credit is available in excess of 4% of tax paid on purchase, and the 4% thus reversed, finds its way into product cost. However, under the GST regime, stock transfers are deemed to be ‘supply’ and are subject to GST. Although one may argue, that GST paid at this stage will be fully available as credit, the realization of the same would happen, only when the final supply is completed. For example, a manufacturer in Bengaluru who needs to supply at Chennai will need to shell out tax, the credit of which he will get only when the supply is complete. What this would do is block the cash flow and thus impact the working capital of manufacturers.

Under the GST regime, stock transfers are deemed to be ‘supply’ and are subject to GSTClick To Tweet
Exclusion of petroleum from GST

5 petroleum products – crude petroleum, high speed diesel, motor spirit, natural gas and aviation fuel – will be outside the purview of GST. This means that the Central Government will continue to impose excise duty and State Government will continue to impose VAT – in other words, cascading of tax will continue. However, the real problem is different – currently, the credit on excise duty paid on these products is available; but once GST comes in, the credit will not be available. Given that petroleum products are commonly used in various manufacturing processes as well as for transportation of products at various stages – this would surely hike up manufacturing costs. This would specifically hit industries such as telecom, fertilizers, power and logistics, where petroleum plays a huge role. GST on these petroleum products may be ascertained by the government at a later date based on the recommendations of the council.

Reduced threshold limit for exemptions

In the current tax structure, INR 5-10 lakh is the threshold limit for exemption for VAT in most states; manufacturing units with turnover at or above INR 1.5 crore attract excise duty, and service tax is payable by units with revenue of INR 10 lakh and above on rendering of taxable services. But in the GST regime, a unified threshold limit of INR 10 lakhs for special category states and INR 20 lakhs for rest of India will come about – which will bring a huge number of manufacturers who were enjoying exemptions earlier into the taxable bracket. However, it can also be argued that a manufacturer who was earlier not a registered dealer, but now becomes liable to register under GST, will potentially gain a huge opportunity to advance his business, as he now becomes part of a network of registered entities who would like to do business with each other.

GST will bring a huge number of manufacturers who were enjoying exemptions earlier into the taxable bracket.Click To Tweet

To be or not to be?

While most of the aspects of GST will have a straight-cut positive or negative implication for the manufacturer, there are certain aspects, for which there is no clear answer, and can be best left to speculation. The manufacturer will need to assess whether he stands to gain or lose with the introduction of GST, and accordingly change his stance.

State incentives

In the current regime, there are quite a few instances where companies would have set up units based on incentives which would have been offered to them by states under their respective investment promotion policies. These incentives are primarily of two types – tariff incentives (lower tax rates, refund / deferment of taxes etc.) and non-tariff incentives (economical land lease terms, lower electricity duty etc.) Currently, states have the flexibility to shell out such incentives, but under GST, all such incentives could be curtailed to achieve the intended uniformity across all states. The GST Law does not state, what would become of all the existing incentives and thus manufacturers will need to reassess their financial projections – as any state could now become as good as another as a manufacturing destination.

Another significant change will be brought about by the fact that GST is a destination based consumption tax, and thus consumption heavy states stand to gain. Thus, it is obvious that producer states will have lower financial incentives to offer compared to consumer states, as GST will be accredited to states where supplies are consumed. Thus, it can be safely assumed that all incentives going forward could potentially be only non-tariff based.

Area based exemptions

Certain manufacturing units enjoy exemption of taxes in certain locations, for example, in specified backward areas, north-east, and hilly states. The GST Law does not offer any clarity on the treatment of such area-based exemptions – but going by the intention of GST to make India a unified market, most exemptions may be removed, and the few that remain will be available in the form of refunds. While companies can always fight their case in front of the government for an appropriate consumption, they could face an immediate loss when GST rolls out in July.

E-way Bill

Going by the revenue neutral rate report submitted by India’s Chief Economic Advisor Arvind Subramanian – trucks in India currently travel an average of about 280 km per day in comparison to those in the US which travel 800 km per day. The reason? – Checkpoints at all our state borders waste a significant amount of time on checking in-transit material as well as on issuing compliance related documents such as way bills, entry permits etc.– thus reducing the efficiency of Indian manufacturers considerably.

In the GST regime – while, there will be a minimization of trade barriers as the corresponding taxes would have been subsumed under GST, the implementation of the same will be easier said than done. Under GST, a registered person who intends to initiate a movement of goods of value exceeding INR 50,000 will need to generate an e-Way bill. While the intent is to unify the Indian market and assist smooth flow of goods, the entire process is cumbersome. It requires participation by the supplier, the transporter and even the recipient – who has to communicate his acceptance or rejection of the consignment covered by the e-way bill within a short span. Thus, there is a fair chance that whatever savings are generated by virtue of reduced inventory costs, may get evaporated while covering compliance and associated technology implementation costs. However, once the initial barriers have been crossed and with greater adoption of technology, the current logistical complications are expected to reduce over a period of time.

In conclusion, weighing the positives against the negatives, it can be safely said that GST will surely be beneficial to the manufacturing segment – with most benefits immediate, and some benefits in the long run. While there are certain aspects which could be challenging in the short term, it is most natural as part of the larger change which augurs a good time ahead, and truly bring to life the efforts and thoughts behind – “Make in India!

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Pugal T & Pramit Pratim Ghosh

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