In this article, Arunava Bandyopadhyay who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Impact of GST on manufacturing sector.

Introduction

“Death, taxes and childbirth! There’s never any convenient time for any of them.”- Margaret Mitchell, Gone with the Wind

• The quote quite truly depicts the uncertainty the society bears in its senses for the socio-economic term known as Taxes. We can fear it, we can delay it, we can hate it the most while its paid, but really we cannot avoid it. It’s part of our every transaction whether cash or digital. It’s a sole man made concept of nation building and balancing the economic well-being of the dwellers. Though we all have heard of various ancient forms of tax collection modes followed from the ancient times and even during the barter system, the basic advent of the modern taxation system is guided by the Canons of Taxation from great economist Adam Smith in his book “The Wealth of Nations”.
• The Canons of Equity, Certainty, Economy and Convenience are always the guiding principle for defining the Taxes being levied by any Nation. Indian, being a diverse and booming economy, took this guidance more than seriously and could gave birth to a number of Taxes sufficient to keep the citizens confused for more than a century. In the 21^st Century, Indian Government took initiative in simplifying it from the root level by launching a new taxation system known as Goods and Services Tax (GST), which will replace a lot many confusing and burdensome taxes and will make things look simpler. Let us embark into the journey in analyzing the impact of GST on the great Indian Manufacturing Sector and we will find out ourselves whether it really simplifies or is a new burden.

The Present Taxation System in Indian Manufacturing Sector

The Indian Taxation system can be broadly divided into two major categories- Direct Taxes and Indirect Taxes. The nomenclature is purely based on whether the tax burden is borne the by the payer directly or shifted to others in the value chain. The Manufacturing sector itself is majorly governed by the Indirect Taxes regime. The Indirect Taxes are further notoriously named as Excise Duty, Sales Tax and Service tax.

Excise Duty

As per section 3 of the “Central Excise Act” 1944, Excise Duty is levied on manufacture of goods, if not otherwise exempted like Salt produced or manufactured in India. The rates are defined in the schedule to the Central Excise and Tariff Act, 1985. It is to be noted that the Excise Duty is not on sale but on removal or clearance of goods which may or may not coincide with sale of the goods. Based on Harmonized system of classification Excise Duty rates are different for each product. Also, apart from Basic Excise Duty, there are Special Excise Duty, Additional Duties of Excise (Textiles and Textile articles) and Additional Duties of Excise (Goods of Special Importance). National Calamity Contingent Duty (NCCD) is another such duty charged on specific goods like tobacco products and mobile phones, as section 136 of Finance Act , 2001. Presently the general rate is 12.5% for excisable goods.

As per section 3 of the “Central Excise Act” 1944, Excise Duty is levied on manufacture of goods, if not otherwise exempted like Salt produced or manufactured in India. The rates are defined in the schedule to the Central Excise and Tariff Act, 1985. It is to be noted that the Excise Duty is not on sale but on removal or clearance of goods which may or may not coincide with sale of the goods. Based on Harmonized system of classification Excise Duty rates are different for each product. Also, apart from Basic Excise Duty, there are Special Excise Duty, Additional Duties of Excise (Textiles and Textile articles) and Additional Duties of Excise (Goods of Special Importance). National Calamity Contingent Duty (NCCD) is another such duty charged on specific goods like tobacco products and mobile phones, as section 136 of Finance Act , 2001. Presently the general rate is 12.5% for excisable goods.

Sales Tax

This tax is levied on sale of goods. Sales Tax is charged both by State as well as Central Government. The State government can charge Sales Tax for intra-state sales and is known as Value Added Tax (VAT) and Central government is empowered to collect Central Sales Tax (CST) on inter –state sale of goods. So each state has its own VAT specific rules.

Local Body Taxes

Sometimes for some specific areas or states or local authority applies local tax which is Local Body Tax (LBT) or Octroi.

Service Tax

It is charged by Service Provider to the Service Recipient and finally is payable to the Central Government. It is governed by the Finance Act, 1994 and its relevant notifications.

Custom Duty

As per Customs Act, 1962 read with Customs Tariff Act 1975, Customs Duty is payable to Central Government on Import of Goods to India. Anti-Dumping Duties, Countervailing Duty of Customs (CVD) like excise duty are applied to boost Indian Manufacturing industry by making imported goods costlier than local produced.

Deficiency in the Present System

The biggest problem with Indirect Taxes is prevailing since its inception. It is a well-known issue called Tax on Tax or Cascading Effect of Taxes. Let’s explore this issue:

Suppose a manufacturer of product A procures raw material at Rs. 100 and pays sales tax of 10%, incurs processing cost of Rs. 25 and keeps operating profit of Rs. 50, so total price of the product Rs. 185, now when this product is bought by another company they pay 10% tax on this product so total cost becomes Rs. 203.5 and when this company sells it to a consumer it again charges Sales Tax, so effectively it becomes a Tax on Tax.

• To overcome this problem VAT concept was evolved through which the buyer gets credit of the Tax paid at earlier stage. But still there is a problem , the VAT is calculated on the value which includes Excise Duty and the credit of VAT is not available against Excise Duty and vice versa.
• Further VAT rates generally vary across states and the states tend to undercut rates to attract investment which ultimately results in loss of revenue for state as well as central government.
• In the present tax system a organization that pays all four major indirect taxes such as VAT, CST, Excise Duty and Service Tax has to file four returns to 4 different departments to get benefit of input tax adjustment against output tax , though it is not available for CST.
• The involvement of so many departments and tax personnel’s makes tax a haunting topic and increases corruption manifold.

Let’s take another example of CST – VAT double taxation. Suppose X from Uttar Pradesh sales goods to Y from West Bengal. Now Y does some value addition and sells it to Z in Uttar Pradesh . The cost scenario will be as follows:

The VAT payable is inflated due to double taxation as Input Tax credit is not available.

The multiple taxation system from state to state creates the necessity create barriers  across states , which affects the Logistics Efficiency and requirement of paperwork and road permits ,  which leads to more corruption and high cost of compliance that ultimately gets compensated by the common man in the form of inflationary prices.

Brief History of GST

• GST was first introduced in France in 1954.
• In India , in 1974 the L K Jha committee first highlighted the need to move into Value Added Tax regime .
• In 1991 , Chelliah committee recommended VAT or GST implementation.
• In 1994, Service Tax implemented in India
• In the year 2000, the Central Government under the Prime Minister ship of Mr. Atal Bihari Vajpayee set up a committee headed by Mr. Asim Dasgupta to design a model taxation scheme for a universal tax in India.
• In 2003, Haryana become the first State to implement VAT
• In 2004 CENVAT introduced to integrate Central Level taxes
• In 2006, Union Finance minister Mr. Chidambaram proposed roll out of GST by April 2010.
• In 2007, the report on GST submitted by Joint Working Group got accepted by the Empowered Committee.
• The committee released its First Discussion Paper (FDP) on GST in November 2009.
• In 2011 , Mr. Nandan Nilekani released Information Technology Strategy for GST.
• After several years of political drama, the Lok Sabha in 2015 passed the 122^nd Constitutional Amendment Bill for GST.
• As per present proposal, GST will become effective from 2^nd July 2017.

What is GST ? How it works?

The Goods and Service Tax system is a proposed indirect taxation system which is supposed simplify the present tax system and merge it into a single taxation system. It is being implemented vide the 101^st Constitution Amendment Act 2016. It is a consumption based tax. The basic principle is to tax the value addition at each transaction. The Tax paid on purchases is allowed as a credit against liability on output / income. It will be levied on all transactions of services and goods.

It is proposed to implement “Dual GST” system in India. All the transactions of services and goods would attract the following two GST:

1. Central GST- tax collection by Central Government
2. State GST- tax collection by State Government
3. IGST – Integrated GST – collection by Central Government

For Sales within the state, earlier VAT and Excise Duty/Service tax will be replaced by SGST and CGST.

For Sales outside the state, earlier CST and Excise Duty/Service tax will be replaced by IGST–which will be paid to the center.

GST will be a destination based tax instead of origin based tax and will be imposed at the point of consumption.

Basically, GST will subsume the following indirect taxes:

At Central level

• Central Excise Duty (including Additional Duties of Excise)
• Service Tax
• CVD (levied on imports in lieu of Excise duty)
• SACD (levied on imports in lieu of VAT)
• Central Sales Tax
• Excise Duty levied on Medicinal and Toiletries preparations,
• Surcharges and cesses

At State level

• VAT/Sales tax
• Entertainment tax (unless it is levied by the local bodies)
• Luxury Tax
• Taxes on lottery, betting and gambling
• Entry tax not in lieu of Octroi
• Cess and Surcharges

The items those will remain outside GST regime are:

• Alcohol
• Petroleum Products
• Land
• Properties

There will be one CGST law and 31 SGST law for each of the States including two Union Territories and one IGST law governing inter-State supplies of goods and services

From the press release dated 4 December 2015, the Revenue Neutral Rate (RNR) as proposed by the Chief Economic Advisor Shri. Arvind Subramanian indicated the following GST rate structure:

Now, let’s consider different scenarios,

Sale and resale in the same state

• For intra state Sales, CGST and SGST will be levied and the collection will go to respective governments. When resold within the same state, CGST and SGST will be levied on increased Sale Price so tax liability will increase, however now the credit of input CGST and SGST will be available and only the remaining taxes will go to the respective governments. As it is between the same government of the state so there is no question of credit transfer.

Intra state Sale and resale in different states

• For the initial intra state sale CGST and SGST will be applicable. For the inter-state resale IGST will be applicable and it will entirely go to central government. Against IGST both the input CGST and SGST will be taken credit of, but the SGST never went to the central government, which amounts to a loss to the central government and it ultimately is compensated by the State Govt. by transferring the credit.

Inter-state Sale and resale in the same state

• IGST will be applicable for the inter-state sale and for resale intra-state CGST and SGST will be applicable. Now for the resale 50% of the IGST credit is taken against CGST and SGST. But here IGST never went to State Govt, so the central govt. compensates state government by transferring the credit.

Advantages of GST

1. Multiple taxations removed
2. Single market for the country
3. Goods and Services at same rate
4. Reduced Tax on manufacturers
5. Credit process simplified

Impact of GST on Manufacturing Sector

The complex tax system in India has affected the progression of Manufacturing sector of India for a long time now. With the Make in India initiative India is on its way to become a major manufacturing hub for Asia and the world, but unless the Tax system is simplified the dream will not be fulfilled. The implementation of the unified taxation system will be a positive step towards this mission and will help the manufacturing sector to stand up and recover.

The analysis of GST’s possible impact on manufacturing sector can be done through analyzing its impact on production cost, operation cost, logistics cost and time and compliance savings. Let’s analyze:

Impact on Production Cost

• As already explained above GST removes the cascading effect of taxes. This will sufficiently reduce raw material cost and production cost. Further easier Tax credit system will allow better accounting and cash-flow situation for the organizations.

Reduction of Transportation time and costs

• GST will ensure removal of multiple checkpoints and permits at state border checkpoints. Almost 60% of logistics effort and time will be saved which ensure more road hours and faster delivery. This will make the manufacturer’s more competitive and will effectively reduce the price of goods at better quality.

Less requirement of Warehouses

• Earlier the state based indirect tax system required manufacturers to set up local warehouses to save cost. The GST system will ensure lesser Warehouse setup requirement. These savings will help the manufacturers in capacity buildup and produce more economically. This will lead the pathway to Just in Time (JIT) production philosophy and less wastage. This would allow a firm to take advantage of economies of scale and consolidate warehouses at the same time reduce capital deployed in the business. At the same time, IT costs of having ERPs deployed at many small warehouses can be saved. This will pave the way for improved service levels at lower cost in the overall supply chain.

Removal of Area Based Incentives

• GST will effectively absolve the Area based incentive scheme and this will ensure the attractiveness of business to other locations and widely spread across the nation.

Easy Credit availment

• Removing the restrictions, now service providers can also avail the credit of VAT/ GST paid on inputs procured, which ultimately will get passed on to the Supply Chain as cost savings.

The advent of geographical business locations

• The decision of setting up business/ logistics/warehousing location will now be dealt by geographical positioning and not on tax based decisions. Many new locations will come up as attractive warehousing or logistic bases. Ultimately this savings will pass into the supply value chain and help in optimizing end product cost.
• The integration of tax on Goods and Services through GST would provide the additional benefit of providing credit for service tax paid by manufacturers. With the implementation of GST, cost of any services, including logistics, will be considered a value add, and the manufacturer will get tax credit for the service tax paid.
• As per the process depicted above Inter State sales will become effectively tax neutral due to the credit mechanism and will be lucrative then intra-state sales, which will help in One India set up.

Larger Warehouses Setup

• With lesser location constraint, the manufacturers can club there warehouses and consolidate into one large warehouse with state – of –the art handling facilities and equipments. At the same time, with larger warehouses, transportation lot sizes will automatically increase, making way for more efficient bigger trucks.

Savings in Taxes payable:

The example we considered when input tax credit for VAT was not available. Under GST the calculation will come out as follows:

The savings in tax cost is clearly visible and this will ensure overall benefit to the economy and the society.

Development of Common National market

• GST will be levied only at the final destination of consumption based on VAT principle and not at various points (from manufacturing to retail outlets). This will help in removing economic distortions and bring about the development of a common national market.

Export Business

• GST is not applied to goods/ services exported out of India, hence it would offer some incentive to develop the export business.

Less Corruption

• Less involvement of reporting and regulating bodies would ensure good governance and less corruption. It will enable reduction of Black money while need for financial compliance will increase, but will be easier with online accessibility.

Conclusion

• The GST regime will be a game changer for Indian Economy and will provide competitive advantage to the Indian Manufacturing industry which accounts for 16% of the GDP. Thus GDP will also get boost with the proper implementation of these changes. However, the Indian political system needs to be adjustable to and mature to understand the cause of the nation rather than vote bank and petty political gains which has plagued the nation till now.
• It is shame for a great nation like India that it took more than 15 years to implement such a beneficial system and slowed the progress of the nation. In the upcoming years Indian citizens and the world would like to see Indian manufacturing industry to lead the nation, then only India can become world leader and prosperous nation. It will accelerate Make in India and the Digital India initiatives and ensure optimized use of the nation’s tax revenue.
• With the new GST, the cost of manufacturing goods is expected to reduce while the consumption goes up. India’s GDP is expected to grow by 1-2% with the proposed GST. Let’s hope for the GST to be implemented as per present plan and a safe progression into the economy with all proposed benefits being availed.

References

1. http://trak.in/tags/business/2015/03/09/overview-direct-indirect-taxation-tax-structure-india/
2. http://www.gstindia.com/gst-impact-on-manufacturing/
3. https://home.kpmg.com/in/en/home/services/tax/indirect-tax/goods-and-services-tax.html
4. http://www.ey.com/in/en/services/ey-goods-and-services-tax-gst
5. http://www.gstindia.com/history-of-gst/
6. http://www.gstindia.com/a-hand-book-for-gst-in-india-e-book/
7. http://www.gstindia.com/goods-st-gst-concept-impact/
8. https://en.wikipedia.org/wiki/Goods_and_Services_Tax_(India)
9. https://www.quora.com/What-is-the-difference-between-the-current-taxation-and-the-new-goods-and-services-tax-GST-in-India-What-is-the-impact