Wednesday 21 June 2017

Impact of GST on Manufacturers

GST Manufacturers

The “Make in India” campaign has provided a huge boost to India’s position on the world map as a manufacturing hub. According to Deloitte, India is expected to become the 5th largest manufacturing country in the world by the end of 2020.
But more importantly for us, it promises to do wonders for the manufacturing sector – which has seen a stagnant phase in the last 2 decades and currently contributes to 16% of our GDP, as per IBEF. And that, surely means good news for our manufacturers.
But is only a campaign going to turn things overnight? Probably not. While the government has a full arsenal of ideas, innovations, and strategies on how to make “Make in India” happen – it has already launched its first weapon – GST.
So, if you are a manufacturer, is GST going to be good or bad for you? Are there things you will need to re-think, as you get ready to embrace GST from 1st July? Let’s explore.

Positive impact

Reduced Cost of Production
Under the present indirect tax regime, a manufacturer cannot claim tax credit on the central sales tax paid on inter-state procurements. Similarly, there are other non-creditable taxes like Octroi, local body taxes, entry tax etc. All this adds to the cost of production.
This problem continues into the post manufacturing stage, since taxes are cascaded. Similar to the manufacturer – distributors, dealers and retailers too are unable to claim tax credit on their input – ultimately increasing the cost of goods for the end consumer. This has a direct effect on the competitiveness of goods manufactured in India versus goods which are imported, and end up hitting the Indian manufacturer indirectly.
One of the greatest boons of GST to the country as a whole is – reduction of the cascading effects of taxes. Tax set-offs are permitted both for goods and services at the production stage – reducing the effective indirect tax and maintaining a steady credit flow for the manufacturer. Not just that – as a manufacturer, one need not take the tension of deciding where to procure from – with GST coming into the picture, a manufacturer can claim input tax credit irrespective of where he sources from – local, inter-state or import (with the sole exception of Basic Customs Duty, which will continue to be levied on imports).
End of multiple valuation methods
Currently, manufactured goods are subject to excise duty – which currently is being calculated via various methods. In some cases – Ad Valorem (on transaction value) is adopted; in some cases Ad Quantum (on quantity) is adopted; in some cases a combination of both. Most of the manufactured goods follow MRP valuation, wherein the duty is calculated in a specified percentage of maximum retail price. What adds to the complication is that the MRP valuation rules themselves are extremely chaotic. Different rules exist for packaged goods sold to individuals vs. packaged goods sold to institutions vs. packaged goods sold as combo-packs or promotional packs.
Under the GST regime however, the GST payable by the manufacturer will be calculated based on the transaction value. This will absorb the complexity of multiple valuation techniques and make life simple for a manufacturer. The only possible exception would be the cess valuation for 2 products, namely – coal, the maximum cess limit for which is INR 400/tonne; and tobacco, the maximum cess limit for which is INR 4170/thousand sticks.
State Wise Registration vs. Factory wise Registration
Earlier, a manufacturer had to take multiple tax registration for multiple factories, even though they were present in the same locality or state. For e.g. – a manufacturer having 10 factories in Karnataka itself, would have to take 10 separate registrations. In short, this was a compliance nightmare for any manufacturer who dreamt big. But in GST regime, since the consideration for taxable event is supply, the same manufacturer can now go for a single registration for all 10 units within a single state. So, no more separate registration for the same taxable manufacturer in a State.
Supply chain restructuring based on economic factors
In the current regime, businesses and supply chains have been typically structured based on the convenience of paying tax.
With GST coming in, a manufacturer will finally be able to concentrate on what is important – business efficiency – and warehousing decisions can be made on operational and economic factors such as costs, locational advantages, proximity to key customers etc. In fact, now that manufacturers can claim input tax credit on inter-state supply of goods and service, we might as well see the entire level of warehouses being wiped out from the supply chain – leading to greater cost benefits.
Reduction of classification disputes
Currently, due to varying rates of excise duty and VAT on different products, as well as several exemptions provided under the excise and VAT legislations, classification disputes are a regular cause for litigation under both central excise and VAT, especially for the manufacturing sector. With the inception of GST – which operates on a simplified rate structure and minimization of exemptions – there will be a significant reduction of disputes regarding classification of products.
No Dual Control
In the current regime, a manufacturer is subjected to dual control – since he is typically assessed by the Centre for Excise and by the State for VAT. In the GST era too, since a manufacturer will be liable to pay both CGST and SGST – there was a genuine concern that a manufacturer will continue to be assessed dually. This aspect of dual control has been deeply discussed and debated by both states and centres. However, the government reached a consensus in January 2017 to avoid dual control. Under the proposed GST regime, 90% of all assesses with a turnover of INR 1.5 crore or less will be assessed for scrutiny and audit by state authorities, the remaining 10% by the Centre. Above that limit, Centre and states will assess in a 50:50 ratio. This step will surely go a long way in adequately protecting the interest of small traders, and making the GST transition a smooth and effective one.
Overall, GST bodes well for a manufacturer in more ways than one – the most significant being the increased ease of doing business and reduced costs on several fronts. But, could there be aspects to watch out for as well? More about that in our next blog on this topic.
Impact of GST on Manufacturers
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 GST 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.
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.

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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