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GST Impact on Manufacturing Sector

India’s complex indirect tax system has affected the progression of the country’s manufacturing sector. With the #MakeInIndia and #DigitalIndia initiative, the country is on its way to becoming a major manufacturing hub for Asia and the world. But, unless the Tax system is made easier to understand and comply with, the dream will not be fulfilled. Hence, here comes Goods and Services Tax(GST) that will be a positive step towards this mission and will help the manufacturing industry to stand up and recover. Here is an attempt at listing down the impact GST will have on the manufacturing sector:

1. Reduction of Transportation Time and Cost

With GST onboard, multiple permits and checkpoints at state border will be removed. This will further save the logistics time and effort and ensure faster delivery of goods. Since the transportation cost will be reduced, the manufacturers would compete with each other, which will cause reduction in the prices of goods with same or better quality.

2. Reduction inRaw Material and Production Cost

The objective of GST is to remove the cascading effect of taxes and follow a unified tax regime in India. This will affect the manufacturing sector in a way that the cost of raw material and production will be reduced. Also, the Input Tax Credit will ensure a better working capital flow for the organizations.

3. Easy Credit Mechanism

Unlike the earlier taxation system, 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. Now service providers can also avail the credit of VAT/ GST paid on inputs procured, and it will eventually pass on to the supply chain as cost savings.

4. The Less the Business Units, The More Productive the Result

Since GST will be levied on every transaction that takes place across all business units, even across different states this will cause businesses to rethink the idea of having warehouses in different locations. Previously to save cost on state based indirect tax system, many businesses had their BUs in multiple locations. With GST implementation, businesses will now deploy work economically, which will lead to timely production of raw materials and also cause less wastage. Even the IT cost will be saved as ERPs would not be required to be deployed in every warehouse.

5. Setup of Larger Warehouses

With lesser location constraint, the manufacturers can club there warehouses and consolidate into one large warehouse with state-of-the art handling facilities and equipment. Simultaneously, with larger warehouses, transportation lot sizes will automatically increase, making way for more efficient bigger trucks. The savings in tax cost is clearly visible and this will ensure overall benefit to the economy and the society.

6. Less Corruption

If the manufacturing industry abides by the set rules of GST, there will be less involvement of reporting and regulating bodies. Good governance and less corruption will walk hand-in-hand, as black money cases will be reduced, thereby paving a pathway for financial compliance with online accessibility.

7. India, a Common National Market

GST will be levied only at the time of consumption, and not production. Earlier VAT was levied at various points (from manufacturing to retail outlets). As a result, retailers had to increase the final cost of goods being sold to the end consumer. With GST, economic distortions will be removed, leading to a common national market.

In ConclusionAs per the process depicted above, due to credit mechanism, Inter State sales will become effectively tax neutral and will be more lucrative than intra-state sales, which will help in One India set up.

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. With the proposed law under GST, the cost of manufacturing goods is expected to reduce while the consumption will scale up. With proper implementation of these changes, India’s GDP will also get boosted and will further cause a growth in the country’s GDP by 1-2%.

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