GST India: Impact on Manufacturing Sector:

Tax Rate:

With the Revenue Neutral Rate recommended at 15 to 15.5% and the standard rate suggested at 17-18% manufactured products are likely to get cheaper due to elimination of cascading effect of taxes on input goods as well as output. As against both Excise (12.5%) and state VAT (12 to 14% applied on top of Excise) being applied currently, a GST rate of 18 to 20% would result in lower prices for end customers. As credit can be availed on VAT and Service Tax (job work, transport etc.) paid on inputs the manufacturer would pass on the benefits accrued to end customer thereby driving down prices. Further, retailers selling manufactured products cannot currently setoff Excise credit on inputs which get passed on to end customers.

Business Process Change:

Under GST any supply of goods will be taxed, meaning intra-state branch transfer between company- owned warehouses would get taxed. Hence companies would be required to redraw their warehousing as additional warehouses and goods transfer would mean more taxes. Hence, multiple layers of warehouses established with the intention of getting located near to the customer will need a relook. Cost savings to the tune of 8-10% in costs associated with warehousing, inventory holding and shorter transit time (due to elimination of border check posts) may accrue.

In the absence of Additional Tax and Interstate CST, under the GST regime both intra-state and inter-state transactions would be no different on the applicable tax front. India would become a common, uniform market and warehousing strategies related to tax efficiencies have to be foregone (one warehouse in each state). More centralized warehouses or branches will come up.

GST being a consumption based destination tax, imports would attract IGST but Exports would not be taxable. Hence, cost of imported inputs used in manufacturing may rise.

Stock transfers / Branch transfer will not be tax efficient and multiple layers of supply chain would add to taxes. Hence under GST, centralized warehousing near to the market would drive down costs. Firms will also need not worry in Tax rate differences between states and state wise exemptions as entire Indian market would act as one.  

Increased compliance requirements also needs to be factored in. Changes to chart of accounts, accounting and migrating for tax credits from Excise/VAT regime to GST need to be considered. Changes to the ERP systems in relation to updating GSTIN of all vendors/customers, realigning of branches/regions, adapting new tax rule setup (masters) are other essential changes that need to be incorporated. 

(The views expressed by the author is strictly personal and do not represent any organization)