GST: Game-changer for manufacturing sector

GST: Game-changer for manufacturing sector

With manufacturing seen as an important sector, the GST regime is expected to ease out bottlenecks, leading to growth and development

GST: Game-changer for manufacturing sector

The great American statesman Benjamin Franklin had once said, “In this world, nothing can be said to be certain, except Death and Taxes.”

The biggest tax system reform — Goods and Service Tax (GST) — has just been executed in India from July 1, 2017.

The manufacturing sector of any country is a foremost important economic driver of all developing economies across the globe. However, unlike its neighbours, India’s manufacturing industry is still scrambling with others and the performance is being lackluster, but there is now we can truly say that we have hope.

According to sources, the manufacturing industry in India has been close to stagnant for the last two decades with only a 16% share of GDP. However, the manufacturing sector might get revived with the efforts of the government and by the implementation of the GST regime, this can even lead to experience a paradigm shift from an agrarian economy to manufacturing and service-based economy.

The implementation of the GST will significantly improve the competitiveness and performance of India’s manufacturing sector. However, prior to its rollout, it will be incumbent upon the government to address certain stakeholder concerns, if it wants to foster long-term growth in this sector.

For India, becoming a manufacturing hub will need various strategic reformations to simplify the existing system in the country. The Make in India scheme has been a much-publicised initiative taken by the government, which is also aligning with the implementation of the GST.
Impact on manufacturing sector

Reduced Cost of Production: There are many other advantages of the new GST administration, and one of them is a reduced cost of production that is expected to be spurred by tax reduction. The GST administration is non-accessibility of union or central tax credit over state taxes, and vice versa, which can be removed, is yet another advantage to the masses. This is going to be done by giving permission to unrestricted tax credit. Even if there is 2% lower tax rate in the GST, it will increase the profitability of the manufacturer by 10%.

More quality-driven competition: Our enterprise is very competitive and now when the final product has the same tax ratios all over India, the only determining factor would become quality of the product. As a result, there will be better productivity as well as proper utilisation of resources.

Free supplies: The checkpoints at the state border, which are tangled with material scrutiny and location-based compliance lead to unproductive production, logistics time and transit hours aligning with regulatory obstruction, which resulted in reduction in the efficiency of domestic manufacturers, while compared with our international counterparts. With the aid of the GST model, it will result in unifying the Indian market, as well as assist in the smooth flow of goods within the country.

Restructuring of Supply Chain Management: Three prospects of the GST — an additional 1% tax on supply of commodities, the supply of goods and services to oneself, and input tax credit on inter-state sale may impel the necessity for supply chain restriction.

As per the Constitution’s 100th Amendment Act, 2015, related to the differentiation between ‘supply to oneself’ and ‘supply from one person to another’, the additional tax should only be imposed in cases where there is a consideration i.e., supply to self should not be covered within its ambit.

In the GST regime, availability of the input tax credit on state supply of goods and services, may result in and impact  warehouse re-engineering that will aid in the removal of an extra level of warehousing needs in the supply chain, hence, concluding in greater cost benefit.
n Area-based Exemptions: The rolling out of the GST will send out positive signals to the world and the country is going to be a unified market. This will make territory-based exemptions seen currently which will lost their distinct importance.

Increased working capital: Impact on working capital may be significant for the manufacturing sector.

Under the current regime, stock transfers are not subject to tax. However, under the GST regime, stock transfers are deemed to be supplies, and are subject to GST.

As GST paid at this stage would result in availability of credit, and realisation of this GST would only conclude when the final supply is executed. This would likely result in cash flow blockages, and therefore, companies would have to rethink their supply chain management strategies to minimise this impact on their cash flows.

Discounts: In The Model GST Law, it is pertained that post-supply discounts or concession are to be excluded from the transaction value; if in any case provided with such discounts, they have to be known at or before the time of supply of goods and are clearly linked to the invoices for such supply. Companies may need to analyse existing post-supply discounts/incentive schemes where the quantum of discount is not known at the supply stage. For example, secondary market incentive schemes, volume-based discounts, etc.

Right education: The government has taken the right initiative to execute GST, but the right education is not been provided to the masses. With right education and sharing of knowledge, all the current chaos of retaliating GST would fade. Right education to masses about the GST scheme will result in better understanding of the fact that more tax payers will be participating in the development of the nation. And as an automatic result of  better funds collection, better deployment of funds for better infrastructure will be executed.

(The writer is CMD of AB Sea Container)

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