GST LLP - GST Impact on Manufacturing

GST Legacy

Impact of GST on Indian Manufacturing

The manufacturing sector in India is a major economic driver. Today, Indian manufacturing companies have attracted the global spotlight and are transforming into significant global competitors. A glimpse of the history, India’s manufacturing sector has fulfilled momentous milestones, from initial industrialization and the license raj to liberalization and the current phase of global competitiveness.

Initially, the Indian manufacturing sector had been severely plagued by the complexities of the current multifaceted taxation structure. Indirect tax legislations often cost the manufacturing companies significant administrative and compliance expenses. Therefore, the implementation of the Goods and Services Tax is expected to provide a critical boost to the already lagging manufacturing industry. The GST will dole out a transformational shift from a complex multi-tiered tax structure to one that is unified and consistent.

Reduced Cost of Production

To reduce the cost of production while ensuring a decent value for customers is a daunting challenge for all manufacturing businesses. The proposed GST will reduce the cascading of taxes and will lead to a lower cost of production. Also, the current tax system does not permit tax credit of central/union taxes over state taxes and vice versa. The GST will remove this clause as unrestrictive tax credit will be permitted.

Increased Working Capital

In the current system of taxation, stock transfers are not subjected to taxes. However, once the GST is implemented, stock transfers will be considered as supplies and will have an applied GST. This is likely to result in cash flow hindrances and therefore, manufacturing companies may have to strategize their supply management strategies in a manner that minimizes cash flow impact. Read IBEF report on the Indian Manufacturing Sector.

Hassle-free Goods Movement

Almost 60% of a truck’s transportation time is influenced by state-border checkpoints along with material scrutiny and location-based tax compliance. This significantly impacts the overall production and logistics time estimates. The implementation of the GST is expected to unify the Indian market and ensure a smoother, unrestricted flow of goods across the country. It cannot be expected that the border barriers will be done away with at once. However, reduced compliance scrutiny is more likely to transpire.

Supply Chain Restructuring

The three basic aspects of the Indian GST – 1% additional tax on goods supply, sourcing of goods and services to oneself and input tax credit on inter-state sales – may create the demand for the restricting of the supply chain structure. The Constitution (100th Amendment) Act, 2015 does not clearly differentiate between ‘supply to oneself’ and ‘supply from one person to another’. Clarity regarding supply is expected from the GST Act which can lead to restructuring of the warehouse strategy.

Also, tax credit on inter-state sale of goods and services will ask for warehouse re-engineering and that can eliminate an extra layer of warehousing in the supply chain.

Improved Compliance Requirement

Though the newly proposed GST implementation offers a range of benefits for manufacturing firms, it does have some constraints as well. As mentioned in the OECD’s (Organisation for Economic Co-operation and Development) guidelines for place of supply, GST is also expected to lead to greater requirement for compliance obligations.

Area-based Exemptions

Manufacturing units in remote or backward areas enjoy tax exemption based on their locations. As per the theory of GST, since the entire country is considered a unified market, the location-based exemptions stand invalid. This might be a true issue of concern for companies currently enrolled under this incentive. Learn more about Area-based exemptions under GST.

Petroleum Exclusion from GST

The impose of excise duty by the Central government on five petroleum products – high speed diesel, petroleum crude, motor spirit, aviation turbine fuel and natural gas – will be continued. The State government will also continue to levy VAT on these petroleum products. Exclusion of petroleum products from GST will add cost to the manufacturers as under the GST scheme, the excise of these products will not be credited. Manufacturing industries that consume petroleum products as main resource will get significantly affected by this exclusion. Read Why the GST Petroleum Exclusion may be bad news?

Deskera MRP is India’s first GST ready manufacturing resource planning software. Deskera, a pan Asia provider of cloud-based enterprise management applications, is also the first cloud-based software provider to offer GST ready software suite in India. Deskera MRP is an end-to-end web-based solution that helps run manufacturing operations seamlessly and offers real-time visibility into every stage of various manufacturing processes.

All in all, the manufacturing sector stands to gain more than losing with the implementation of India GST. Overall reduction in the cascading effect of taxes should have a positive impact on the price of manufactured products. However, concerns still arise on specific issues such as the additional 1% origin tax, increased cash flow issues and increased costs owing to exclusion of petroleum fuels from the ambit of GST.