IMPACT OF GST ON MANUFACTURING SECTOR IN

INDIA

SUBMITTED TO:
MR. RANA NAVNEET ROY

SUBMITTED ON:
8TH APRIL 2019

SUBMITTED BY:
APOORVA CHANDRA
SEMESTER X
SECTION C
ROLL NO. 25

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIP

Contents
1. Introduction ......................................................................................................................................... 1
2. Current Tax Structure ........................................................................................................................... 1
2.1. Direct Taxes .................................................................................................................................. 1
2.2. Indirect Taxes ............................................................................................................................... 1
2.3. Characteristics of Indirect Tax Structure ...................................................................................... 1
2.4. Advantages of Indirect Taxes ....................................................................................................... 1
3. Issues with Current Tax Structure ........................................................................................................ 2
3.1. Multiplicity of Taxes and Duties ................................................................................................... 2
3.2.Lack of Uniformity of Provisions in State VAT .............................................................................. 2
3.3. Distinction between Goods and Services ..................................................................................... 2
3.4. Barring States to levy Tax on Services .......................................................................................... 2
3.5. Distortion of Taxes due to Exemptions ........................................................................................ 2
3.6. Cascading Effect of Taxes ............................................................................................................. 2
3.7. Complexities in Tax Administration .............................................................................................. 2
4. Manufacturing Sector ........................................................................................................................... 3
5. Goods and Services Tax (GST) .............................................................................................................. 3
6. Key Features of GST .............................................................................................................................. 3
6.1. Dual GST ....................................................................................................................................... 3
6.2. GST on all Transactions ................................................................................................................ 3
6.3. Consumption or Destination based Tax ....................................................................................... 4
6.4. Input Tax Credit ............................................................................................................................ 4
6.5. Administration of GST .................................................................................................................. 4
7. Impact on Business Side ....................................................................................................................... 4
8. Impact on Government Side ................................................................................................................ 6
8.1. GST: The Journey So Far ............................................................................................................... 6
8.2. GST: Challenges Ahead ................................................................................................................. 6
9. The Consumer Perspective: Effects of GST on the society ................................................................... 7
10. Conclusion ........................................................................................................................................ 8
11. References ...................................................................................................................................... 13
 1. DECLARATION OF ORIGINALITY

I, Apoorva Chandra, have undergone research of the project work titled “Impact of GST on
manufacturing sector of India”. I hereby declare that this Research Project has been prepared by
the student for academic purpose only, and is the outcome of the investigation done by me and
also prepared by myself under the supervision of Dr. Rana Navneet Roy, Faculty of Indirect Tax,
Hidayatullah National Law University, Raipur. The views expressed in the report are personal to
the student and do not reflect the views of any authority or any other person, and do not bind the
statute in any manner.

I also declare that this Research Paper or any part thereof has not been or is not being submitted
elsewhere for the award of any degree or Diploma. This report is the intellectual property of the
on the part of student research work, and the same or any part thereof may not be used in any
manner whatsoever in writing.

Apoorva Chandra
Roll. No. 25
Semester X, Section C
 Introduction

Touted as India’s biggest (indirect) tax reform, the goods and services tax (GST) bill was
passed by Lok Sabha (Lower House) on August 8, 2016 and was incorporated into the Indian
Constitution by 101st Constitution Amendment Act on September 8, 2016.
The current indirect tax regime in India consists of multiple taxes levied by center as well as
state government The share of indirect taxes stands at 44.4% of total tax collection in India.
In 2015-16 the indirect tax collection was estimated to be Rs. 6.39 lakh crore. The current
indirect tax system is plagued with problems of multiplicity of taxes, complex structure,
cascading effect of taxes and tax arbitrage. GST is seen as a solution to this taxation system.
In order to evaluate the GST, one first needs to understand the existing tax structure and its
impact on the relevant sector.

2. Current Tax Structure

The current tax regime consists of two types of taxes – Direct taxes and Indirect taxes2.

2.1. Direct Taxes

These are imposed on income, wealth or expenditure of a person or a corporation. The burden
is directly felt by the entity paying taxes.

Example – Income tax, Corporate tax.

2.2. Indirect Taxes

These are imposed on goods and services. The tax is paid by the manufacturer or the service
provider but its burden is transferred to the consumers of such goods and services. Some
transfer it directly by charging taxes in addition to price of goods/services while others
transfer it in the form of higher price of such goods/services.

Example – Service Tax, Excise Duty, Value Added Tax (VAT), Customs Duty, Central Sales
Tax (CST)
 2.3. Characteristics of Indirect Tax Structure

In Indirect taxes the incidence and impact falls on different persons. Which means it is
charged to one person but its effect is felt by another person.

It is regressive in nature. So, more impact is borne by the lower income group.

Manufacture, purchase or sale of goods or services is considered as a taxable event for indirect
taxes.

2.4. Advantages of Indirect Taxes

Indirect taxes are included in the price of goods and services. So, consumers don’t feel the
burden of paying taxes and hence there is no resistance in paying taxes. Indirect taxes are
easily collected as it is relatively easy to keep record of goods and services in an organized
sector. Manufacturing activities take place mostly in organized sector where records are
maintained. So, manufacturing sector becomes a key sector for collection of indirect taxes.
Also, indirect taxes can be strategically used to support development in target areas. This
paves way for indirect tax reforms in line with other developmental projects by Government
of India (GOI).
 3. Issues with Current Tax Structure

The current tax structure is indebted with a lot of taxation difficulties and issues. Some of
them are discussed as3:

3.1. Multiplicity of Taxes and Duties

There is multiplicity of taxes under current tax structure with taxes levied by central
government, state government and local bodies. Central government levies Excise Duty on
produced goods, Service Tax on services and Customs Duty on exports and imports of goods.
State government levies taxes like VAT, Purchase Tax, Octroi, Entry Tax and Duties on
liquor. Additional taxes levied includes Cess, Road Tax, Entertainment Tax, Stamp Duty and
Luxury Tax. Such multiplicity of taxes leads to complex tax structure, tax burden, additional
paperwork and thus also leads tax evasion.

3.2. Lack of Uniformity of Provisions in State VAT

There is lack of uniformity in VAT structure across different states. Differences arise due to
different categorization of goods, threshold limits, exemptions and taxing procedures. Such
complexities increase in cases of goods transferred between two states.

3.3. Distinction between Goods and Services

In case of intangible goods like software services, broadcasting and composite contracts in
which goods are provided along with services, complexities arise as different states and
central government categorize them into different groups leading to different taxes on similar
types of goods and services.

3.4. Barring States to levy Tax on Services

State governments are barred from levying taxes on services. This arrangement poses
difficulties in composite contracts involving sale of goods coupled with services.
 3.5. Distortion of Taxes due to Exemptions

This issue is relevant to CENVAT which has area and sector specific conditional or non-
conditional exemptions. Such exemptions give rise to complexity arising among goods
transferred between states with different rules for such exemptions.

3.6. Cascading Effect of Taxes

Current taxation system leads to cascading of multiple taxes on both state and central taxes.
Tax are levied on goods and while subsequent taxes are levied on the same goods, it does not
discount the taxes paid earlier. Such tax structure results in cascading of taxes due to which
the final price of goods become much higher than it should be otherwise.

3.7. Complexities in Tax Administration

Despite improvements made in current tax structure, the administration of taxes is still highly
complex at both state and central levels. Dispute resolution, reimbursement of taxes is still a
complex and expensive affair leading to delayed tax collection, tax evasion and continuously
increasing price of goods.
 4. Manufacturing Sector

Historically, India is being seen as an agrarian country. However, the gap in GDP
contribution from agriculture sector and non-agricultural sectors have been continuously
increasing. The manufacturing sector has emerged as one of the high growth sectors in India.
Programs like ‘Make in India’ are launched to make India a global manufacturing hub. The
Government of India has set an ambitious target of increasing the contribution from
manufacturing sector to 25% of Gross Domestic Product (GDP) by 2025, from current 16%.4
Manufacturing sector deals with production of goods and services, so it comes under the
indirect tax regime. A change in indirect tax regime, therefore, impacts the whole sector.

However, the sector is marked with concerns ranging from declining exports and labor issues
to lack of infrastructure. In addition to this, it is burdened with compliance of complex
indirect taxation system. Multiple legislations have resulted into burgeoning compliance and
administrative costs, valuation disputes and increasing difficulty of doing business. As per
The World Bank, India ranks at 130 in terms of ease of doing business.5 This calls for a
change in the current indirect tax structure which can do away with the complexity of the
existing tax structure and give a strategic boost to the sector. Deemed as a solution to this,
Goods and Services Tax (GST) has been proposed as one tax for one nation and is being
looked upon to have a beneficial impact on several sectors including manufacturing sector.

5. Goods and Services Tax (GST)

The Goods and Services Tax (GST) is a comprehensive Value Added Tax (VAT) levied on
goods and services. Its main purpose is to replace all the multiple taxes levied under the
current tax structure by a single nation-wide tax. GST will be collected on the value added at
each stage on purchase or sale of goods and services based on input tax credit method but
without any state boundaries6. GST will be levied at every stage of distribution chain. While
current taxes are production based taxes, GST is a consumption based tax. As GST, will
cover most of the goods and services, it will be levied in four slabs
– 5%, 12%, 18% and 26%. About 80 items are to be exempted from GST. These includes
food items, petroleum products and alcohol.

6. Key Features of GST

GST in current state is widely different from current tax structure. Few of the key features of
GST are listed as:

6.1. Dual GST

Government of India has proposed a Dual GST regime. GST will have two components:
Central GST (CGST) to be levied by Central Government and State GST (SGST) to be levied
by State Government. However, the basic regulations governing the tax like chargeability,
classification of goods, definition of taxable event etc. would be uniform across all statutes.

6.2. GST on all Transactions

GST will be applicable on all transaction of goods and services except for exempted goods
and services. The CGST and SGST will be levied on all transactions of goods and services
made up to the final consumption by the consumer. In such format, transfer of goods from
one warehouse to other warehouse would also be taxable under GST Law. Thus, this will
cause major supply chain changes of manufacturing firms. This is further discussed later.
 6.3. Consumption or Destination based Tax

GST will be charged on the basis of consumption or destination as opposed to the traditional
taxes which are production based. Thus, revenues from GST will flow to the state where
consumption takes place and not the producing state. Such a system leads to disincentives for
states where production has already been setup. In order to compensate the producer states,
GOI has allowed state governments to levy 1% production tax in addition to SGST.

6.4. Input Tax Credit

Liabilities of SGST and CGST will be calculated on the basis of input credit method. This
means, the credit will be available for tax paid on all immediate purchases of goods and
services on the basis of suppliers’ invoice. In manufacturing sector, a good pass through
multiple stages before being converted into the final product. Under current tax regime, this
results into cascading effect wherein a good is taxed on its final value which already has a
portion of tax in it and not on the value added at each stage. Thus, leading to overall increase
in price of the final product.

6.5. Administration of GST

The administration of GST is distributed as per SGST and CGST – States will administer
SGST while Central Government will administer CGST. Respective governments will have
the jurisdiction over the entire value chain and on all the taxpaying entities on the basis of
described thresholds. However, there is no clear guidelines on how the existing tax
departments will be modified to replace traditional taxes by GST.

7. Impact on Business Side

One of the largest tax reforms, India has seen, is on the verge of being implemented and will
impact businesses whether big or small. In order to understand what this means, we spoke to
Mr. Akshat Agarwal, director of an export oriented textile unit & Mr. Umesh Joshi, Head of
replenishment at Britannia to understand what this reform would mean for the manufacturing
sector and how it would impact their businesses.
The industry as a whole is very enthusiastic about the implementation of the GST as it will
finally end the cascading effect of taxes which has plagued the country for generations. Also,
cross credits settlements between the state government and the central government is one of
the celebrated moves of the GST which was not possible in the current regime. What this also
means is that it would result in lowering of overall costs for the manufacturers which coupled
with application of tax on the cost at factory rather than on MRP will further help the
manufacturers lower prices. But all this depends on which slab the goods will fall under. The
manufacturing sector is still not clear under which slab their goods will fall and with just
three months for the implementations it has the left these manufacturers worried. On
discussion with Mr. Umesh Joshi we learnt that reworking the pricing cannot be done
overnight and usually takes about three to four months especially in case of fast moving
consumer goods as the product quantity is usually adjusted to keep the product at a certain
price level and hence entails manufacturing setup and packaging changes. For Mr. Agarwal,
the lead time for his product ranges between three to six months and the laid-back attitude of
the government has him worried as he is unable to give his international clients the price of
the product. There is no clarity from the governments end as to what will happen to the
current duty drawback schemes once the GST is implemented which is very important in
order to determine the pricing of the product in a highly competitive business.
With respect to the supply chain changes, we stand to understand that the manufacturers
operating from one single state have nothing to worry about. Manufacturers operating from
multiple states will now need to pay tax even on stock transfers. Though this GST paid would
be made available as credit, but this would entail locking of the working capital till these
goods are sold further down the supply chain. Apart from this the manufacturing sector have
set up their warehouses based on the tax incentives they get in a state. Now decisions may
need to be made on economic efficiency point of view. Mr. Umesh Joshi explained to us that
for products such as food items it would make more sense to have multiple warehouses and
manufacturing setups in various states as it reduces their distance from the end consumer and
hence their costs. This would be true for any low value product. But for high value products it
would make more sense now to use economies of scale and operate from one roof in one
state. The key hindrance between state transfer is the 1% IGST which the bill dictates. This
1% additional tax may hinder the second option and make it feasible for some manufacturers
to set up their manufacturing units closer to the point of consumption.

One of the key changes that would be required is the change of the ERP systems to make it
compliant with the GST. This would entail both manpower and monetary costs for the
manufacturers. Also, there is not much clarity on when these updated modules would be
available so that the manufacturers can train their staff much ahead of the implementation in
order to ensure a smooth transition. A key point of the bill is that, the credit to the
manufacturer will be transferred only when the vendor has sold the goods to files the tax
return and both their invoices match. By doing this the manufacturers will need to choose
trustworthy vendors otherwise it would result in blocking of working capital for the
manufacturer. Also, these vendors will need to setup their own GST network in order for the
system to work smoothly.

In terms of already existing long term contracts, the manufacturers will need to renegotiate
them in terms of price, advance, taxes etc. to make them GST complaint which again adds to
the many challenges that the manufacturing sector will face for this implementation. For
example, the recipient of an advance needs to ensure that the sender pays the GST on the
advance otherwise the recipient shall be liable for it.
On the question of future capital investments, the thoughts they shared with us were very
much in sync. Up until now, the states had attracted investment solely based on the tax
incentives they were able to devise (sometimes even overnight) but now they will need to do
some ground work in terms of infrastructure development to attract future investments. Thus,
this puts all the states on the same level playing field in terms of attracting future
investments. For the investment that has already been made based on the tax incentives that
were offered, once the GST is implemented, such incentives would not be possible as there
will be a shift to consumption tax and hence tax would be collected in the state of
consumption and hence the manufacturer will not be able to claim refund under the tax
incentive they were offered. The manufacturing sector will need to rework their return on
investments based on these changes and at the same time may need to negotiate some type of
deal with the government as there has been no clarification in this regard form the
government.
 8. Impact on Government Side

The government is all set to roll out the GST in the upcoming months. While the activity is
focused mainly on improving different aspects of business side, government functioning and
implementation with regard to taxation is likely is to be affected as well. Also, there are many
challenges that the government needs to tackle in order to have successful implementation of
India’s largest tax reform till date.

To understand the impact on government side, we had an interaction and follow up

discussion with Mr. K Balamurugan, Indian Revenue Service, Customs & Central Excise. He
provided a candid view of GST, its origins, implementation, and challenges. We also
discussed about the impacts on the manufacturing sector.

8.1. GST: The Journey So Far

GST is the much-needed fiscal reform needed in the country. Many opponents of GST give
the argument that it is a regressive tax, effecting the poor as well as the rich.
However, studies have shown that indirect taxes could be the best way to bring tax equality.
The split of tax revenue in India is 50-50 between direct and indirect taxes. The long-term
aim is to push this more towards the realm of indirect taxes. This step promises to increase
the governments tax revenue.

The foundation of GST was laid down in 2007 by Mr. Chidambaram. The initiative had a
twofold story the DTC (Direct Taxes Code) & GST (Goods and Services Tax). While the
former has died a political death, the latter promises to shine presently.

There is a plethora of indirect taxes in India such as VAT, customs, central excise, service tax
and many more. GST envisions to unify them under one umbrella. It will be a value-added
tax, at every point of value addition.

The concept is not new to the world. It dates back to 1950’s. In the 1960’s the success of
VAT was evangelized by IMF and lead to widespread adoption. Over 150 countries have
adopted indirect taxes in one form or the other. There is however a dark side to this story. In
every country where GST was introduced, the immediate impact was a dip in growth and
political instability. Almost every party which bought out these changes in their respective
country, lost power soon after.

Thus, it is a great challenge for the central government to make this shift. This problem is
further aggravated by the conflict in interests of different state governments. Take for
example Karnataka, a state which has invested heavily into developing manufacturing
capabilities and receives tax revenues on business originating from its state. As per GST, all
the tax in for of production tax and cross border transport is gone and the state in which the
product is sold will be collecting the net taxes.

The major debate on reaching a consensus on this bill is thus the revenue sharing between
different states and center. It has been stipulated that the center will compensate the state for
lost revenue over a period of 5 years to bring them on board.

8.2. GST: Challenges Ahead

Indian constitution 101st amendment act paved the way for implementation of GST under the
GST council. It also brings with it a mandated deadline of September 2017 when states will
stop receiving tax revenues if they are not through GST. This fact has led to different states
and political parties resolving their issues on revenue sharing in the past few months at a fast
pacE
The biggest challenge to GST implementation is Invoice matching. As and when a good
moves through the supply chain from manufacturer -> warehouse -> wholesaler -> retailer ->
end customer; the invoice number will move with the good and will be tracked at each point
of value addition. At every point of transaction, the invoices will be matched to enable tax
credit transfers which will make evasion difficult. To perform this humongous task, it calls
for a solid IT infrastructure. Introducing GSTN (Goods and Services Tax Network), a 49-51
split organization between Infosys and GOI. Currently, about 60% of the project is complete
and work is going on at a fast pace. GSTN network will check and make sure that only after
the taxes are paid on a good, that the corresponding tax credits will be passed on to the
manufacturer.

GST will ensure greater tax discipline among traders and India’s tax to GDP is bound to
increase because of this. However, for a section of retailers who were avoiding taxes, this
would come as a huge blow and may cause public unrest. It is believed that the GST fiscal
reform would take a 10-year stabilization period and would see an initial dip in growth. The
burnt will be the highest in the year 2019 and thus, GST has also now become a political bet.

Leading account keeping software vendor, Tally has come up with GST match facility on its
systems. In a broad sense, the accounting and tax filing practice will become easier and give
a boost to MSMEs by reducing middlemen and improving transparency via automatic returns
facilitated by GSTN.

In a city like Bangalore where 30 thousand businesses are registered but only 6 thousand
filing their taxes, GST brings a promise of widening the tax net and could potentially lead to
lower tax rates in the future. All the data regarding businesses will be stored on the cloud and
brings with it data security issues.

It is important to note that many sectors are free from the ambit of GST and it is not so
uniform as it was promised to be. Road taxes, real estate stamp duty, liquor taxes and taxes
on petroleum products will continue to persist on their own. With the amendment act hanging
with the deadline of September 2017 and the recent fiasco of demonetization effecting the
economy; it has indeed become a tricky way ahead for GST.
This shift will force firms to change their strategy in terms of distribution. New business
agreements will be framed among various parties of the supply chain taking into
consideration the implications of GST. The whole exercise was championed by the multi-
national companies who wanted simpler tax reforms. Will the investments now rise as we
move ahead with GST? Will the supply chain get smarter and integrated and be fueled by
credit growth? Will the honest retailers who pays his taxes on time be incentivized by the
manufacturers? Only time will tell.

9. The Consumer Perspective: Effects of GST on the society

Apart from business advancement and ease of doing business, end consumers of the
manufactured goods will also be impacted in ways which are speculative as of now.

There is a general expectation among consumers with the cascading effect of tax gone with
GST, prices will see a downward trend. The GST is constructed in such a way that it will lead
to substantial benefits and savings in costs that would accrue to the end consumer. However,
that may not be the case for all goods. The estimated GST on all commodities is expected to
be in the range of 17% to 19%. For the purchase of most goods there are two components of
taxes levied to the end consumer:

• Standard Excise Duty: 12.5%

• VAT: 12.5% to 15% depending on the State tax laws

Thus, the effective tax rate of goods is about 25% to 28% due to cascading effect of taxes as
discussed earlier. The final prices of goods will thus be cheaper under GST rate. FMCG
products, automobiles and other goods will see a decrease in final prices.

However, for goods like textiles, edible oil, low value footwear, the tax rates in the current
system is different.

• Standard excise duty: 0%

• VAT: 5% (in most States)

• Non-creditable taxes: 3% to 4%

The effective tax rate is about 8 to 9%. The current GST rate of 18% would mean almost a
doubling effect on current prices of these goods. Even if a slab of 12% is applied, it will lead
to a considerable hike in prices. Services would see a price hike in general due to increase in
taxes.

In spite of the savings on costs for businesses, it is up to them to pass on the benefits to the
end consumers and hence it needs to be ensured by the government that the benefits are
indeed transferred to the consumer. The government has introduced the ‘anti-profiteering’
clause in the GST bill to ensure this.

In the long run, improvements in supply chain efficiencies will reduce the production cost for
the firms which in turn will give a headroom for reduction of prices

The introduction of GST will also make tax systems more transparent for the consumers.
Earlier there would be a lot of Cess and taxes applied. That confused the consumer. Now,
they will be able to clearly see the amount they are paying as tax without any ambiguity.
 10. Conclusion

Analysis of the impacts of GST implementation on manufacturing sector in India reveals

many sides of the story. It is undoubtedly the biggest tax reform the country has seen in
decades and time is also apt for the same with the government making its push to develop
India as the manufacturing hub for the global market.

On business side, the tax structure would be simplified, removal of cascading effect on tax
would drive down costs for manufacturers, state governments would come up with better
proposals and infrastructure facilities for attracting industries, supply chain can be better
planned for optimal efficiency. But in the wake of not so clear regulations about tax slabs,
businesses are in midst of confusion and unprepared to tackle the changes brought on by the
policy changes as well as face other challenges of employing trusted vendors, locking up of
working capital etc.

On the government side, the government will need to make immense efforts for smooth
transition to GST. This will involve setting up the huge infrastructure, overhauling of taxation
practices, stabilizing the loss of revenue for state governments, defining clear cut tax slabs for
goods and services. The state governments would now need shift their focus from tax
revenues to creation of jobs, infrastructure developments etc. and come up with better plans
to attract industries for all round development and enhance the ease of doing business.

Consumers of the manufactured goods can expect a decline on prices of many goods they
consume as well as increase in some of the products. The effect of cost savings due to
taxation changes and optimized supply chain will mostly be passed on to the end consumers
and they’ll be more aware of what taxes they are paying.