GST Impact on Suppliers on e-commerce Platforms

India’s e-commerce sector is expected to cross revenue of Rs.12,000 crores in 2020, according to a joint Assocham-Forrester study. It is also expected that the sector will grow at an annual rate of 51%, the highest in the world. The Indian Government’s recent move of currency demonetisation and the vigorous push for digitisation in every aspect of life has only propelled the e-commerce industry’s growth.

For a supplier on an e-commerce platform, it is certainly an exciting time to do business, given the accessibility to geographically distant customers, low operational costs, and the scalability that e-commerce provides. At the same time, taxation on e-commerce transactions in the current regime is ambiguous and different states have different levies of tax. The advent of GST will bring a lot of questions in the minds of suppliers on e-commerce platforms. Will GST bring uniformity in taxes on e-commerce across the nation? What will be the impact of GST on their profit margins and operational costs?

Let us understand the impact of GST on suppliers on e-commerce platforms.

Seamless availability of input credit

Current regime

In the current taxation regime, e-commerce platforms charge Service Tax on the services provided to suppliers on their platform, such as warehousing, logistics, marketplace commission, etc. Suppliers cannot claim input credit on the Service Tax paid on these services, and it becomes a cost. Similarly, the Excise duty paid on goods is also a cost to a supplier in the current regime.

GST regime

A great positive for suppliers in the GST regime is the seamless availability of input credit. Under GST, input credit will be available on all inputs used in the course of or for the furtherance of business. In effect, this will result in reduced cost of operations for suppliers as they will now be able to take the credit of tax paid on inputs, which was until now adding up to their cost.

A great positive for e-commerce suppliers in the GST regime is the seamless availability of input creditCLICK TO TWEET

Uniform taxation across states

Current regime

In the current regime, suppliers have to keep track of the state-wise taxation rules relating to the products they deal in. The same product is taxed at different rates in different states. In some cases, due to ambiguity in dealing with the models of e-commerce business, multiple taxes are imposed on the same product. Many states are also imposing entry tax on the entry of goods sold online to their states.

GST Regime

Under GST, all goods and services will be assigned specific tax rates which will be uniform across the nation, regardless of whether they are sold at physical stores or online.  Hence, as a supplier, GST brings greater reachability to customers across the nation.

For e-commerce suppliers, GST brings greater access to customers across the nationCLICK TO TWEET

Mandatory registration

Current regime

Many suppliers on e-commerce platforms are not registered under the current tax regime, as their turnover does not exceed the threshold limit. This enabled sale of products at a lower price as compared to registered dealers. Compliance tasks such as maintenance of detailed accounts and invoices, and filing of returns are also not required.

GST regime

In the GST regime, all suppliers on e-commerce platforms have to mandatorily register. Hence, irrespective of how low their turnover is, a person supplying goods or services on e-commerce platforms has to register and fulfil the duties as a registered dealer, which includes maintaining detailed accounts and records, filing returns and paying taxes on a monthly basis. This can be perceived as unfair to e-commerce suppliers because for persons making supplies through physical stores, registration only on crossing of the threshold limit is the rule and they also have an option of paying tax on composition basis if their turnover does not cross Rs. 50 Lakhs. Also, suppliers who own their own portals do not come under the scope of e-commerce and hence, need to register only if their turnover exceeds the threshold limit. The need of the hour for e-commerce suppliers is to prepare for the additional compliance activities and cost which GST will bring. This can be made easier by using technology to make compliance activities easier, inculcating discipline in maintenance of accounts and records, and careful planning of cash flows.

Under GST, all suppliers on e-commerce platforms have to mandatorily register.CLICK TO TWEET

Cannot become composition tax payers

Current regime

Under VAT in the current regime, suppliers with turnover less than Rs.50 Lakhs can opt for the composition scheme, by which they only need to pay taxes at a small percentage of their turnover and file returns usually on a quarterly basis, depending on the state from which they operate.

GST regime

Under GST, such suppliers cannot opt for the composition scheme even if their turnover is less than Rs.50 Lakhs. They have to be registered as regular dealers.  For such suppliers also, compliance activities and cost will increase under GST due to the requirements of filing returns and paying tax on a monthly basis along with maintaining accounts and records in the prescribed manner.

Cash flow will be impacted

Current Regime

E-commerce suppliers generally operate on thin margins. Once a sale is made through an e-commerce platform, the e-commerce operator collects the money from customers and remits it to the supplier, after deducting the marketplace commission. Let us take an example of a supply in the current regime.

Example: Fast Deals is an e-commerce operator and Rakesh Pvt Ltd is a registered supplier on the platform. Rakesh Pvt Ltd supplies a mobile phone on Fast Deals for price of Rs.11,200 (including VAT) on 1st May, ’17.

Particulars	Rs.
Value of mobile phone sold	10,000
VAT @12%	1,200
Sale price	11,200
(-) Marketplace commission, including Service Tax*	(-) 200
Amount remitted to supplier by e-commerce operator	11,000

* Assuming marketplace commission of Rs. 200 for illustration purposes.

GST Regime

Under GST, e-commerce suppliers will face 2 challenges:

1. Their cash flow will be affected by the tax collection at source (TCS) @ 2% by operators. In the GST regime, operators are liable to collect tax on supplies made through their platform and remit only the remaining amount to the supplier.

Let us consider the same example as above in the GST regime.

Particulars	Rs.
Value of mobile phone sold	10,000
GST @ 12%	1,200
Sale price	11,200
(-) Marketplace commission, including GST*	(-) 200
(-) TCS @ 2% on Rs.10,000	(-)200
Amount remitted to supplier by e-commerce operator	10,800

* Assuming marketplace commission of Rs.200 for illustration purposes.

Here, the amount remitted to the supplier by the e-commerce operator is Rs.10,800, after deducting TCS. Hence, when the monthly impact of TCS on an e-commerce supplier is analysed, the amount of cash blockage becomes quite significant, especially for small dealers operating on thin margins. This tax paid will be available as input credit to the supplier on 15th of the next month, which means cash blockage of 30-45 days.

1. The input tax credit (ITC) available to e-commerce suppliers depends upon their vendor’s compliance. The tax paid by an e-commerce supplier on purchases from his/her vendor can be availed as ITC only if the e-commerce supplier’s vendor has filed the monthly return and made full payment of the tax due. In case of non-compliance by the vendor, the e-commerce supplier will lose the eligible ITC. In such situations also, the suppliers’ cash flows will be significantly impacted.

Hence, e-commerce suppliers must consider the impact of TCS and non-compliance by their vendor while making decisions on the vendors to be selected, the product pricing, and working capital.

Conclusion

For suppliers on e-commerce platforms, GST certainly brings cost reductions in the form of availability of input credit and the levy of a single tax on supplies across the nation. It is expected that it will be easier to do business in the GST regime with greater clarity on the treatment of e-commerce transactions and uniformity in the taxes levied. However, suppliers must also be prepared for the impact on their cash flows due to tax collection at source (TCS) by e-commerce operators, non-compliance by their vendors and payment of taxes on a monthly basis. Compliance activities will also increase for suppliers in the GST regime due to mandatory registration. They cannot opt for composition levy even if their aggregate turnover is less than Rs.50 Lakhs. Being a regular dealer requires filing of returns on monthly basis and maintenance of detailed accounts and records. As a supplier, it is important to plan and prepare for the GST regime. Awareness of the compliance requirements under GST, proper training of resources to handle these requirements and use of technology to make all this easier will ensure that suppliers can capitalise on the new era of e-commerce in India.

Update on GST Acts and Rules

The Government is making all efforts to stick to the timeline of 1st July for GST implementation. In the 15th GST Council meeting on 3rd June, 2017, the rates of 6 items were decided, including gold, footwear and textiles. All the states, except West Bengal, have also agreed to roll out GST from 1st July, 2017. Following is the status update on the GST Act and rules:

In the 16th GST Council meeting on 11th June, 2017, the GST Council lowered the tax rates for 66 items and raised the limit on turnover for composition tax payers from Rs. 50 Lakhs to Rs. 75 Lakhs.

GST Acts

• CGST Act, IGST Act, UTGST Act and Compensation to the States Act have been passed in the Parliament and have received presidential assent on 13th April, 2017. Following are the finalized Acts:

CGST Act

IGST Act

UTGST Act

Compensation to the States Act

• SGST Act has been passed in 25 states, the latest being Meghalaya.

Rules

GST rules finalized are:

• Composition
• Valuation
• Input Tax Credit
• Invoice, debit and credit notes
• Payment
• Refund
• Registration
• Return
• Accounts and Records
• Transition

Rules on Advance ruling, Appeals and revision, Assessment and audit, e-Way bill are still in draft.

Formats

GST formats have been finalized and are given below:

• Composition formats
• ITC formats
• Payment formats
• Refund formats
• Registration formats
• Return formats:
  • GSTP formats
  • Mismatch formats
  • Return formats
• Accounts and records
• Transition

Rate Schedule

Over 1200 goods and 500 services have been assigned GST rates in the 4 tax brackets of 5%, 12%, 18% and 28%. There is also a Cess over and above the peak rate of 28% on demerit and luxury goods. The finalised rate schedule of goods and services is given below:

Goods	Services
Goods decided in GST Council meeting on 18.5.’17 Rate schedule Addendum to the Rate Schedule	Rate schedule
Goods decided in Council meeting on 3.6.’17 Rate schedule Addendum to the Rate Schedule	Services under Reverse Charge
Goods decided in Council meeting on 11.6.’17 Rate schedule	Classification scheme for services
Compensation Cess rates	Classification scheme for services
IGST exemption and concessions list Approved in meeting on 3.6.’17 Approved in meeting on 11.6.’17

The next GST Council meeting is scheduled on 18th June, 2017, to discuss issues related to e-way bills and lottery.

How will GST Transform the Indian Wholesale Market?

India is a land of growing consumerism. With about 14 million retail points serving the end customer, in both urban and rural markets, it is a mammoth task for manufacturers – especially those of FMCG and consumer durables – to address the demand. What makes this even more challenging is the fact that as on today, 92% of the retail sector is unorganized – making it practically impossible for a manufacturer to cater to the last mile, solely on the strength of direct distribution channels.

The inevitable saviour? The Indian wholesale market.

A preamble

Before we delve further on the impact of GST on the wholesale market, it is probably useful to understand the position of a wholesaler in the supply chain, vis-à-vis a distributor, who too, is a middleman between the manufacturer and the retailer. While the nature of business is pretty much the same, the behaviours are different.

A distributor, for instance, has a commercial relationship with the manufacturer. As a result, while he may deal in multiple product lines, he ensures that they are non-competing in nature. While he mostly services retailers who are his regular buyers, he occasionally services the wholesaler as well. A distributor often is a part of the principal manufacturer’s promotional efforts, providing manpower and cash support to roll out schemes across their chain of retailers. He also provides a range of services such as product information, estimates, technical support, after-sales services, and most importantly credit to their retail customers. In a bid to safeguard his business, he will often have agreements with the principal manufacturer, which limit the number of distributor entities in a particular territory. All in all, a distributor is quite organised, maintains a healthy margin, and has almost the same equation with retailers, as manufacturers have with him.

A wholesaler, on the other hand, largely operates without any commercial or business obligations. He buys in bulk – mostly from the manufacturer, occasionally from the distributor – and resells it, again in bulk – mostly to retailers and occasionally to distributors and other wholesalers. His bulk-buying nature allows him to bargain for lower prices from the manufacturer. Also, he often deals in a huge range of contrasting products, as long as it results in overall profit for him. Retailers – especially small ones in urban and most rural ones – flock to him, because they can get products at lower costs (thus the term, wholesale rates) and, they are not subjected to any terms and conditions, like distributors are. However, the flip side is, the wholesaler does not offer any credit, as he himself works on thin margins, and mostly does not take back unsold inventory/stock. This retailer-wholesaler dynamics allows manufacturers to achieve sales from those markets, where they are not able to handle direct retail sales and shipments.

GST impact on wholesale

Having discussed how wholesalers operate, we can now start to appreciate that not only distributors but wholesalers too, are extremely crucial cogs in the supply chain wheel, which manufacturers cannot survive without. Thus, while manufacturers may have started preparing to brace the impact of GST on themselves and their direct channels – distributors and outlets, they will also be fairly concerned about the wholesalers that they work with. With the wholesale market on its way to recovery after being hit by the demonetization wave last year, it remains to be seen how it will negotiate the bigger wave of GST about to hit the shores of the Indian economy, come July 1st.

Here are 4 ways in which, we believe, GST will transform the Indian wholesale market –

1. More wholesalers paying tax

Wholesalers, as discussed above, are mostly into bulk transactions of a wide range of products, and immediate payments in cash. Also, they may buy both from manufacturers as well as distributors – which entail different tax liabilities for them. Since most wholesalers do not have an excise registration, they cannot pass on the excise tax liability to the next buyer in the chain, and the tax credit chain is broken, pretty early on. Coupled with the fact that the tax jurisdiction in the existing taxation regime is not transaction based – the need to maintain a neat record of invoices, that too for compliance, goes down and more focus is given to the prime business activity of buying and selling. This has led to a scenario, wherein most wholesalers are unable to stay compliant due to the associated complexities, leading to reduced tax liabilities. This allows them to undercut market prices, and generate volume sales. While this still translates into wafer-thin profits – as low as 1 percent – life is good for the typical Indian wholesaler, as he follows a largely credit-free policy.

Under the GST regime however, every invoice pertaining to taxable supply has to be uploaded on the GSTN’s common portal and has to be accepted by the buyer. On top, GST subsumes most of the indirect taxes, which leads to seamless tax credit flow across the chain, irrespective of whom the wholesaler is buying from and selling to. Also, it no longer entails multiple registrations for multiple taxes – making it much easier for a wholesaler to stay compliant in the coming times. Yes, there may still be those few truant wholesalers or retailers who may choose not to abide by the compliance norms. However, the only possibility for tax evasion will arise if every single entity in the supply chain is non-compliant – which is highly unlikely. The rest of the compliant wholesale channel is bound to boycott business with such entities after a while – practically forcing them to start filing proper returns in order to sustain business relations and definitely, their business. In short, the GST era will see the large segment of wholesalers being brought into the tax bracket.

2. Destocking during the transition phase

One of the biggest challenges for the wholesale market has always been, that their business hinges on low margins. In the wake of demonetization last year, it went through a major cash crunch, and the most natural response to the same was to de-stock to improve their liquidity. FMCG players such as Dabur and Tata Global Beverages have predicted a repeat of the same once GST comes in, primarily because of the last mile i.e., the retailers fearing about the availability of input tax credit on the existing stock.

To begin with, retailers who are currently registered under state VAT laws would have paid VAT on all the stock held on the transition date. Although provisions have been incorporated in the GST Law, wherein VAT paid under the current regime will be allowed as input credit under the GST regime – the government has imposed certain conditions for availing input tax credit on closing stock; not all retailers may make the cut.

Further, for goods lying with the retailers on which excise duty is paid – 100% tax credit will be available only if the excise value is ascertainable by means of invoices, and if not, only 40% tax credit will be available. In most of the cases, the excise tax chain stops with the first stage dealers – wholesalers and distributors. Tax is passed on to the retailers as additional cost, which means that most retailers will never be able to claim the full excise tax credit, as it does not appear in their invoices at all. Ultimately post GST, they will be forced to pass on this cost to their customers, making their prices much less competitive to other players. This is bound to trigger most retailers across the chain to de-stock the inventory during the transition phase and eventually re-stock again under the new GST regime. And once that happens, demand to the wholesaler will fizzle out, leading wholesalers to de-stock as well. However, once the GST era dawns, this could also translate into a steep rise in demand for goods as a result of a widespread re-stocking of goods by wholesalers.

3. Direct channels on the rise, Wholesalers on the wane

As GST inches closer, more and more FMCG and consumer durable players are becoming wary of their wholesale businesses.Sanjiv Mehta, CEO and MD of HUL recently opined that post GST, the wholesale sector will take at least a quarter or more to stabilise – which could lead to the overall contribution of wholesale coming down significantly, compared to direct coverage.

This is because GST will cause disruptions in the core behaviour of a wholesaler – bulk transactions; selling purely on cash basis; not giving credits and using the same to maintain liquidity in the business; operating on thin margins, and so on. As discussed earlier, GST will see more wholesalers stepping into the tax bracket – which will entail not only efforts but costs as well. With their already thin margins becoming thinner still, their sheer survival will be in question. At the same time, their survival is of extreme importance to the principal manufacturers, who need them to service the long tail of retailers and kirana shops in both urban and rural areas.

However, if that needs to happen, manufacturers will need to support the sinking wholesaler by pumping business benefits – in terms of further reduced pricing, increased commissions etc. However, the effort required on the direct distribution channel will be much less – as most distributors, would have already started working with the respective manufacturers and invested in the right technology to become GST compliant – for their own sake. All this, could gradually make wholesaling a more expensive deal compared to direct distribution, and thus most manufacturers – especially of FMCG and consumer durables – are sure to extend their direct reach, wherever feasible, in a bid to become more cost-effective.

In short, while wholesale is still important, the post-GST period could see a major spike in company owned direct outlets and more penetration of distribution channels. This will also be good news for the more organised modern wholesale players such as e-commerce and cash & carry outlets – who will easily trump the unorganized supply chain, cracking under the pressure of GST compliance.

4. India – an open market for Wholesaling

Typically, the current indirect taxation regime in India has driven supply chain decisions of businesses. More often than not, supply chain models have been designed keeping in mind the tax liabilities, multiplicity of taxes and costs involved with inter-state supplies. As a result, wholesalers tend to do business with manufacturers within the state, and end up serving the last mile of retailers with a limited product portfolio.

GST is set to change that picture. To begin with, the movement of goods, in the absence of multiple taxes like entry and octroi – will open up business at an all India level. The seamless availability of input tax credit across state boundaries will bring forth increased efficiencies in the supply chain, and allow manufacturers to remain competitive outside their home states as well. While the manufacturer will gets access to a wider base of distributors and wholesalers across the country; for the wholesaler too, it is an advantage – he can now align with manufacturers outside his home state, expand his product portfolio, and make the most of the additional opportunity – to not only generate more sales from existing retailers, but serve more retailers in the same geography.

Conclusion

GST will definitely transform the Indian wholesale market like never before. While there is a fair chance that it could hit them initially in the same way as demonetization did, the benefits of GST in the long run – coupled with their own willingness to become tax compliant, will allow them to not only survive but also garner more benefits in terms of revenue and overall growth.

Impact of GST on 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.

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.

Under the GST regime, stock transfers are deemed to be ‘supply’ and are subject to GSTCLICK TO TWEET

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.

GST will bring a huge number of manufacturers who were enjoying exemptions earlier into the taxable bracket.CLICK TO TWEET

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!”