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Impact of GST on Manufacturing Industry

June 14th, 2017 Intech Systems GST Law and ERP, Microsoft Dynamics

The manufacturing sector is a driving force for any country. India has been called an agricultural land and making manufacturing the main driver of economy seems far-fetched. India’s complex tax structure can partly be blamed for the stagnant growth of this industry. As per the sources, the manufacturing industry in India has been close to stagnant for the last two decades but its share in GDP is increaing. The impact of GST on manufacturing industry is going to be huge and in addition, could lead to a paradigm shift in developing this sector.
GST will help businesses to realign bottlenecks such as production costs, logistics and supply chain, operations, financials, compliance, etc. Though there are uncertainties in the implementation process of GST, we can figure out the high-level effects of GST on manufacturing sector.

Reduced Cost of Production

Cost of production is expected to be reduced with the reduction in tax cascading by GST in India. Also, you can remove non-availability of tax credit of central/union taxes over state taxes and vice versa by allowing unrestrictive tax credit under GST.

Distribution model restructuring

Under the current tax structure, businesses are operating on state warehouse model to avoid the Central Sales Tax. In the GST regime organizations can operate on the single warehouse system. Input tax credit on the interstate transfer of goods would be available, reducing the cost of the product and making it cost competitive.

Increased compliance requirements

GST is going to be much more automated and will demand stricter compliance to the law. Though it might seem difficult for businesses to cope up with the new law, this increased compliance needs will reduce the loopholes in the tax framework.

Hassle free Supply of Goods

The checkpoints at the state border are tasked with material inspection and location-based tax compliance. This hinders transportation to a great extent leading to unproductive production and increased logistic time and transit hours. The GST law, a destination based tax, will smoothen the transits, reduce compliance scrutiny and make the flow of goods – both interstate and intrastate – efficient.

Free Supplies

In the current tax system, free supplies are not taxed under VAT. While GST law states that supply of goods between persons without consideration is deemed to be a “supply” and thus will be taxed. Similarly, free samples may also be taxed under GST, leading to an overall increase in costs.

Area based Exemptions

Manufacturing units are given some exemptions based on their unit location in specified backward areas, capital investments, etc. Under GST, there is no such clarification regarding this exemption. Organizations can make a representation to Government for appropriate compensation, if any.
Notwithstanding few glitches, GST law combined with “Make in India” initiative will have a positive impact on manufacturing industry of India.