The manufacturing sector is considered to be a major driver for the developing economies all around the world. However, unlike others, the manufacturing industry in India is still scrambling and the performance has been lackluster. GST, the destination based tax structure implies that the states with manufacturing base would possibly lose revenue that would be compensated by the union government around INR 500 billion in the initial year itself. The primary states which would require compensation are Maharashtra, Gujarat, Tamil Nadu, Uttar Pradesh and Haryana. Proceeds from additional cess on luxury items/ sin goods would constitute the pool from where the states would be compensated for the loss of revenue.
On GST roll out, there will be neither a burden on the ultimate customer of 2% CST nor any load on the back of the sellers to receive Forms like C form and F form. This CST advantage is of specific significance to the manufacturing sector because the input cost of manufacturing is very much affected by the cascading CST. Under GST, the manufacturers of goods will be able to procure inputs from all across the nationwide market without paying CST for interstate procurements.
Increase in compliance
Since India has adopted dual GST model where both the union and state government have concurrent jurisdiction for administering the tax, the taxpayers will need to obtain registration in each state where they operate and are required to file separate returns. This would result in an increase in compliance requirements.
Branch and depot transfers would be treated as a taxable supply accordingly, and IGST would be charged on transfers which are made from one state to another. It would result in an increase in the working capital requirements.
It is because, tax is payable on date of stock transfer, and the Input Tax Credit(ITC) is effectively used when the stock is liquidated by receiving branch/depot. Therefore, under the GST regime, for businesses which are engaged in the stock transfers, particularly in case of FMCG and pharma goods, the requirement of additional working capital would arise due to tax instances. It would be a challenge for the SMEs who are operating with a thin line of working capital. They will be required to change their strategies concerning cash flow to minimize its impact.
Reduction of classification disputes
The Value Added Tax (VAT) and the Duty of Excise are levied on various products at different rates and also exceptions notifications under those two things generate disputes. Therefore, the Indian manufacturing industry suffers classification related disputes causing needless litigation procedures. With the introduction of GST, it is expected that the number of classification disputes as well as the litigation procedures would reduce to a minimal.
Area based incentives
Under the previous indirect tax regime, the manufacturing concerns located in backward regions of the country and states enjoy tax exemption benefit. However, under GST no such exemption is available to the manufacturers. In future, it is expected that manufacturers will raise their respective concerns to the government and will ask compensation in return.
Matching concept of credit
Input tax credit would be admissible only when tax has been paid to the credit of the government. However, a proper mechanism needs to be set for coordinating with vendors for ensuring timely payment of tax to the government, failure of which will disentitle the credit to the buyer.
The Indian manufacturing sector may revive under the dedicated efforts of government and by the implementation of GST regime could even lead to a paradigm shift from an agrarian economy to a diversified manufacturing hub. For India to become a manufacturing hub, it would also require several strategic reformations for simplifying its existing system.