The manufacturing sector is a major economic contributor for the economic development of any country. The goods producing sector comprises of businesses engaged in the transformation of materials, substances and components into products. It employs almost 12% of the labor force in India. Prior to the implementation of the goods and services tax (GST), the manufacturing industry in India was facing many problems from decline in exports, infrastructure spending to the cascading effects of taxes because of the multiple taxes in the indirect tax system prevalent at that time. GST implementation subsumed most of the indirect taxes of the previous regime, removed internal trade barriers, and unified the Indian market, creating a milestone in tax transformation in our country.
The ‘Make in India’ initiative started by the government aligned with the implementation of GST, a systematic tax system that brought about uniformity, eliminating the cascading effects of tax, improving tax revenue, and upholding its moto of ‘one India, one tax’. The primary intention of the concept of GST is to simplify taxation, improve compliance, and foster a unified national market in the country. Its implementation has had both positive and negative impact on various sectors of the economy, including manufacturing. Here, we delve into the affects of GST on the manufacturing sector in India.
Positive Impacts of GST on the manufacturing sector
In the last seven years since its inception, the government introduced many procedural, technological and rate changes, trying to make compliance easier for taxpayers. The participants that are taxpayers, tax experts and tax authorities, have also adopted the changes and tried to keep up with the evolving tax procedures and economic conditions. Nevertheless, there have been both positive and negative impacts of GST on the manufacturing sector. The positive effects are:
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Simplification of tax calculations
In the old tax system, manufactured goods were subject to excise duty, which is computed differently in different states, creating confusion in valuation methods. GST follows a transaction-based valuation that makes calculation of tax much simpler for the manufacturers. Moreover, in the pre-GST regime, different tax authorities assessed the manufacturers, and they had to file multiple returns. After the implementation of GST, compliance became easier because of the automation of tax compliance procedures. The e-invoicing and e-way bill systems has positively impacted compliance management and improved revenue collection. The streamlined tax structure has reduced compliance burdens and administrative complexities for manufacturers.
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Reduction in cost of product
The subsuming of multiple indirect taxes, resulting in the elimination of the cascading effect of taxes, has been effective in reducing the cost of production for manufacturers. The removal of entry tax for interstate transfers is the major reason for reducing the cost of production of goods. For example, a supplier had to pay entry tax for supplying construction material from say Karnataka to Maharashtra, which was 5% of the value of the goods. The supplier would in turn pass this cost to the customer, resulting in increase in selling price. This tax is now subsumed, thus decreasing the burden for the customers.
The key benefit of GST is the provision of input tax credit. Before the implementation of GST, manufacturers could not claim the taxes paid for procurement, on services like rent for warehouses, logistic cost, retail stores, etc., which were added to the sale price of the goods. This increased the price of the goods, which consumers had to bear. In the GST regime, manufacturers can claim credit on the tax paid on input goods and services used in the manufacturing process. This not only reduces the end price of the product but also helps to improve the cash flow for the manufacturers.
In the previous regime, manufacturers had to register each manufacturing unit separately, even when it was in the same state. GST simplified the process by allowing single registration for all manufacturing entities within the same state. For example, if a manufacturer has branches in Bangalore, Mysore and Belgaum, in the previous regime, he had to register each unit separately. Under the GST regime, a single registration is sufficient for the entire state of Karnataka. But if the units are in different states, separate registrations are required.
The GST regime has eliminated multiple taxes, reducing the cost of production. This, in turn, means lower prices for consumers. For example, before the introduction of GST, a SME manufacturer had to pay Excise Duty, Central State Tax and sometimes VAT. Now they need to pay a single tax, that is GST. Previously, they had to pay excise duty at12.5%, while VAT levy was 12.5% or 5%, and CST was at 2%, But under GST, most of the items come under 12% or 18% tax, except luxury and SIN items, which are taxed at 28%.
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Restructuring the supply chain
The complex indirect taxes before the implementation of GST, like excise duty, service tax, VAT, etc., created inefficiencies and high costs in the supply chain, leading to the cascading effect of taxes that the end consumers had to bear. GST replaced the multiple taxes with a single uniform indirect tax, simplifying the tax collection process and streamlining business operations for better efficiency. One example is of warehousing. In the old regime, warehouse management had to be based on arbitrage between varying VAT rates across states. GST has changed this, bringing in more economic efficiencies and more customer-centricity
GST has reduced interstate barriers, facilitating the creation of a common national market. In the old tax regime, tax rates on commodities differed from state to state. GST has a uniform tax rate throughout the country. Apart from tax rate, there has been uniformity in input tax credit, compliances, intrastate procurements, and refunds. The single online portal manages all GST compliance, including generating E-invoices, E-way bills, filing returns, lodging refund claims, assessment processes, etc. There is uniformity in operational guidelines promoting ‘ease of doing business’, achieving the objective of ‘one nation, one market’ of the government.
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Reduction of classification disputes
In the previous regime, due to the varying rates of excise duty and VAT on different products, and the many exemptions provided under excise and VAT regulations, classification disputes and litigation under both central excise and VAT were regular. GST subsumes all taxes and is based on a simplified rate structure with minimal exemptions. This has been effective in reducing disputes related to the classification of products.
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Boost the ‘make in India’ initiative
The government launched the ‘make in India’ concept to make India a global manufacturing hub. The implementation of GST gave a boost to this initiative by making our products competitive in international markets. The subsumption of multiple taxes, resulting in eliminating the cascading effect of taxes, uniformity in the rates of tax, and a uniform national market with the removal of trade barriers have contributed to making India a major contender in the global market. The reduction in production cost, simplifying supply chain, creating a unified national market, and generating more jobs have brought much progress in the manufacturing sector and given a good boost to the ‘make in India’ initiative.
Negative Impact of GST on the manufacturing sector
Despite impressive growth after the implementation of GST and with the ‘make in India’ initiative, the manufacturing sector is still facing many challenges. A significant cause of concern for the sector in its growth trajectory are the ever-changing tax rules and rates of GST in India. The negative impact can be summed up as follows:
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Increase in working capital requirements
Advance receipts are taxable as per GST rules. Moreover, stock transfers are treated as supply and hence taxable. Branch and depo transfers are taxable and IGST is applicable on these transfers. This increases the requirement for immediate working capital. The manufacturers must pay the GST on raw materials and products, which can only be claimed as input tax credit later, leading to more working capital requirements.
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Requirement of efficient transaction management systems
Due to stricter tax compliance procedures, manufacturers must streamline transactions for which efficient transaction management systems are required, which means more cost. For example, credit related to an invoice can be availed of only up to one year of the invoice date. Further, the reverse charge mechanism necessitates the manufacturer carefully assess and track the supply process and their timelines. This is because the liability to pay tax falls on the recipient of goods or services instead of the supplier, which is dependent on the time of supply. This implies hiring a skilled compliance workforce, better systems and software and better legal considerations, which in turn leads to higher costs.
The predominantly unorganized section of the manufacturing sector in India follows labor intensive processes including accounting, finance, and inventory. The GST regime is a technology driven product where everything from registration to filing of returns and other compliance processes must be done online. Small and medium manufacturing businesses are finding it difficult to adapt to the new norms and regulatory processes. Understanding the complexities of the new tax regime became very difficult for them and many did not register under GST. This led to disruptions in manufacturing activities and the growth of these industries got restricted.
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Impact on supply chains and cash flow
The complexities of the new regime with strict compliance and documentation have caused a negative impact on the supply chain of the manufacturing sector. The delays in the movement of goods and increased administrative burdens have hampered the smooth flow of products across the supply chain, adversely affecting the performance of many manufacturing businesses. As the businesses must pay the GST on the invoices rather than on the payment receipts, their cash flows are considerably impacted, especially with longer payment cycles.
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Difficulties in claiming credit
The eligibility criteria for claiming credit for manufacturing companies is complex and requires strict adherence to GST laws. Managing extensive documentation, invoices, bills of entry, etc., is difficult for companies with complex supply chains. Matching the input tax credit with supplier details on the GST portal poses challenges. Discrepancies and delays often lead to rejection of claims. The reverse charge mechanism, where the recipient pays the tax on behalf of the supplier, makes claiming credit more complex. Navigating restrictions on eligible inputs, capital goods and input services can lead to omissions or errors, complicating the process further.
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Sector-specific challenges
Within the manufacturing sector, industries like textiles, pharmaceuticals, and automobiles, have experienced specific challenges under GST. The changes in tax rates and classification have impacted pricing strategies and profitability in these sectors.
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Conclusion
The Goods and Services Tax (GST) has undoubtedly brought significant reforms to the Indian manufacturing sector by streamlining operations, eliminating the cascading effect of taxes, making our products competitive in global markets, removing trade barriers, and creating a unified national market. The ‘make in India’ and ‘atmanirbhar’ initiatives have given a boost to the sector. But there are many challenges that the manufacturing sector faces and has yet to overcome. Addressing these challenges through the simplification of compliance processes, reformative policies, and providing specialized support to SME’s is crucial. The manufacturing sector forms the backbone of our economy, providing revenue and employment to a considerable section of our population. GST has an important role in the transformative process of this sector by providing adaptive measures that help it grow to its maximum potential.
Frequently asked questions
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Is GST registration compulsory for all manufacturers in India?
Answer: Manufacturers with an annual turnover exceeding the specified limit of INR 40 lakhs for the supply of goods are required to register under GST in the common portal provided by the government.
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Can manufacturers claim ITC for the taxes paid on inputs used in the manufacturing process?
The most significant advantage of GST for manufacturers is the provision to avail input tax credit on inputs, raw materials, and capital goods used in the manufacturing process. To do so, they have to ensure that the suppliers file their GST returns accurately and within the specified time.
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What are the invoice requirements for manufacturers?
Answer: Manufacturers are required to issue GST-compliant invoices for the supply of goods. The invoices must contain details like the supplier’s and recipient’s GSTIN, description of goods, quantity, value, tax rates, and other information and must be in the format prescribed under GST.
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Are the manufacturers required to file GST returns?
Answer: Manufacturers must compulsorily file the regular GST returns, which comprise of details of outward and inward supplies, taxes collected and paid, and other details as required by the tax authorities.
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Is e-way bill mandatory for manufacturers?
Answer: When the supply involves the movement of goods above the threshold limit specified under GST, it is mandatory for the manufacturers to issue an e-way bill with details of the consignment, like vehicle number, details of the item, consignor, consignee, etc., as required.
