The manufacturing sector has a share of only 16% in the GDP of the country. It has not moved much in the past two decades. The sector has its own set of problems with the bureaucracy, inadequate infrastructure and complex taxation issues, not allowing it to progress much. The sector seems to see some light at the end of the tunnel with the “make in India” initiative by the government. This is likely to provide a host of opportunities and transparency in compliances required to make investments and manufacture in India.
To simplify manufacturing in India a host of strategic reforms are required. The most significant of them is the implementation of the Goods and Services Tax popularly known as the GST. The GST bill proposes to do away with the complex multi layered taxation and instead bring in a destination based unified taxation system. This is likely to reduce the cascading of taxes and bring about a better manufacturing synergy in India.
Currently the manufacturing industry is plagued by the non-availability of tax credit for central taxes over state taxes and vice-versa. The CST paid on procurement of raw material from other states cannot be claimed as a tax credit. This takes the cost of production higher. With the GST expected to turn the country into one large unified market, the interstate taxation will be a thing of the past. To make provision for the loss of CST revenue, the GST bill seeks to provide a 1% tax on interstate movement of goods for initial few years.
The state border checkpoints slow down the flow of raw material and finished goods. These are the inefficiencies in the current transportation and logistics and drastically impact the manufacturing industry. With reduced tax compliance check expected at the interstate borders with the GST introduction one can expect smooth flow of goods across the country.
At present some of the manufacturing industry enjoys the exemption on certain taxes based on their location in backward areas or special economic Zones. These may become irrelevant with the GST launch. How the GST bill addresses the concern of the entrepreneurs, who are availing these exemptions, remains to be seen.
The GST rate with figures rumoured to be in the 25 % and above range can negate the positive sentiment associated with the GST move. Most of the industry wants the figure to be around the Revenue Neutral Rate or RNR. The RNR is expected to settle around 17~18% range.
The 1% tax on interstate transfers of supplies proposed in the amendment needs some clarifications. The supply to oneself has to be different from supply from one person to other. The GST council is likely to shed light on this issue and in all likelihood will not tax the supply to self. If this is achieved the manufacturing sector can rethink on its supply chain and warehousing strategy. The removal of extra warehouses will reduce costs and help profits.
All said and done the GST will also enforce a strict discipline on tax compliance which should augur well for the manufacturing sector in the long run with reduction in the tax rates.