GST AND THE MANUFACTURING SECTOR

Posted by: Rajat Kumar, Head of Finance

The manufacturing sector of any country is certainly deemed to be the economic driver for its economy. It is,
owing to the manufacturing sector that the resources are utilised in such a manner so as to maximise the economic
boost, thereby making way for competitive trade and business to take place, both nationally as well as globally.
India, along with the other developing nations has emerged as one of the high growth sectors in
the manufacturing domain. Taking the manufacturing and technological sector to a new height is
the ‘Make in India’ project helmed by the Government of India under the leadership of Prime
Minister Narendra Modi which is all set to maximize the country’s demographic and geographic
advantages.
GST (Goods and Services Tax) acts as a boost to maximize competitiveness and performance in
India’s manufacturing sector. Declining exports and high infrastructure spending are just some of the
concerns of this sector. Multiple indirect taxes had also increased the administrative costs for
manufacturers and distributors and with GST in place, the compliance burden has eased and this sector
will grow more strongly.
However, it is owing to the GST that the business which was not under the tax bracket earlier will now
have to register thereby leading to lesser tax evasion. Most of the tax burden is borne by domains such as
IT services, telecommunication services, the Insurance industry, business support services, Banking and
Financial services, etc. These pan-India businesses already work in a unified market and will see
compliance burden becoming lesser. But they will have to separately register every place of business in
each state.

The Impact of GST on the Manufacturing Sector

1. Reduced Production Cost: One of the many advantages of the new GST administration is the
reduced cost of production. Under the erstwhile tax regime, manufacturers had to pay an
excess of 25-26% as production costs, quite clearly due to the effect of cascading taxes
such as excise duty (at 12.5%) and VAT (at 14.5%), on the lines of taxing two different
taxable events. Now under GST though, tax would be levied on single taxable event. This
consequently means goods are expected to get cheaper, thus, driving more sales and
lending the concerned stakeholders a strong hold in an increasingly competitive market.
2. Hassle Free Supply of Goods: The new GST model has unified the Indian market and
assisted the smooth flow of goods within the country by eliminating the unnecessary waiting
time spent on the checkpoints at the state border which are tangled with material scrutiny
and location, leading to unproductive production, logistic time and transit hours aligning with
regulatory obstruction which thereby reduce the efficiency of Indian manufacturers
compared to their international counterparts.

3. Inclusive taxes mean less costs and better quality of goods and services – A
significant factor in bringing down the production cost is that most of the taxes on inter-state
supplies that were earlier not creditable (central sales tax, OCTROI, entry tax, etc.) would
now be available for set-offs, thus, reducing the burden on the manufacturing sector and
setting up a steady flow of credit. With most taxes getting subsumed under the GST
structure(except customs duty, Stamp Duty which will continue to be levied as before), other
participants in the trading channel also stand to gain from this move i.e. retailers and
distributors will now be able to avail credit on the taxes levied, and such accessibility of input
tax credit at various stages of the commercial process would effectively lead to reduced
prices, which can safely be considered a win-win scenario for both the manufacturing and
other related sectors and the end consumer.

4. Streamlined supply chain leading to improved business efficiency – The ‘one-nation-
one tax’ concept of GST has forced the businesses to re-engineer their supply chains
providing to them the encouragement to focus more on optimizing business efficiency and
operability. Plummeting storage costs, less time wasted at various checkpoints, and
ultimately, the emergence of a sturdy manufacturing sector are all the many benefits of the
streamlined supply chain.
5. Only registration as per the State to apply henceforth – Erstwhile, whenever a single
manufacturer had multiple factories in a single state, he was required to obtain a separate
registration for each of the factories, but now, under the current GST regime, a single
taxable manufacturer will have to apply for a single registration only no matter how many
factories they had. This logically means less paperwork and less bureaucratic intervention to
be dealt with at every stage, eventually resulting in better business management.