The biggest indirect tax reform in the country since Independence has brought a lot of hope as well as questions from various quarters. How would it affect manufactures and distributors. Experts feel that the new unified tax would bring along benefits for the manufacturers and retailers as it avoids cascading of taxes and simplifies compliance; plus it would also bring in one standard rate for all products across States. Implementation of GST is expected to bid farewell to the different VAT rates that are currently applicable in different States, thereby bringing about uniform taxation across States. It is also slated to ensure easy movement of goods between States. Moreover, GST is also expected to cut the cost of goods manufactured in India, which should thereby benefit the end consumer.
Experts believe that GST would be an advantage for the Indian Economy. This is because GDP is anticipated to grow by 2 to 3 per cent on the back of an expected boost in exports and consumption. An increase in the number of tax payers leading to an increase in tax revenue for the government is also expected.
The implementation of GST will thus significantly improve the competitiveness and performance of India's manufacturing sector. However, prior to its roll-out, it will be incumbent upon the Indian government to address certain stakeholder concerns, if it wants to foster long-term growth in this sector.
Impact on working capital may be significant for the manufacturing sector. Under the current regime, stock transfers are not subject to tax. However, under the GST regime, stock transfers are deemed to be supplies and are subject to GST. Though GST paid at this stage would be available as credit, realization of this GST would only occur when the final supply is concluded. This would likely result in cash flow blockages and therefore companies would have to rethink their supply chain management strategies to minimize this impact on their cash flows.
Under the present indirect tax regime, free supply of goods are not subject to VAT. The Model GST Law stipulates that specific transactions without consideration would also be treated as supplies. Accordingly, free samples may be subject to GST, leading to increase in overall costs.
Another issue faced currently is the cascading of taxes at the post manufacturing stage. Dealers, retailers etc. are subject to taxes on their input side which are not creditable (service tax on input services, excise duty on capital goods). This leads to an increase in the cost of goods, ultimately affecting the competitiveness of Indian manufactured goods vis-à-vis imports.
Such issues are addressed under the Model GST Law, which permits tax set-offs across the production value-chain, both for goods and services. This will result in a reduction of the cascading effect of taxes and bring down the overall cost of production of goods.
Current supply and distribution models are structured to optimize indirect tax impact arising at various levels of value addition. Transition to GST should hopefully result in such decisions being taken to optimize business efficiency (as opposed to indirect tax efficiency). For example, currently warehousing choices are often based on arbitrage between VAT rates in different States/ between applicable VAT and CST rates. With the advent of GST, it is hoped that such warehousing and logistics decision would be based on economic efficiency such as costs and locational advantages vis-a-vis key customers. However, a key hindrance could be the proposal to levy a 1% origin tax on inter-State supplies.
The Central government will continue to impose excise duty on five petroleum products (petroleum crude, high speed diesel, motor spirit, natural gas and aviation turbine fuel), while the State governments will continue to impose VAT on these petroleum products. Currently, credit of excise duty paid on specified petroleum products is available. However, exclusion of petroleum products from GST will add to the cost of manufacture as excise duty on such products would not be creditable under the GST regime. Petroleum products such as high speed diesel, are common fuels used in various manufacturing processes, as also for transportation of inputs and final products. Therefore, industries that consume petroleum products as their main inputs (such as the fertilizer industry which use natural gas as an important input) will get significantly impacted by this exclusion.
The manufacturing sector thus stands to benefit significantly with the introduction of GST. The overall reduction of cascading effect of taxes, especially on the post-manufacture stage of the supply chain should have a positive effect on the cost of manufactured products in the hands of consumers.
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