5 ways manufacturing sector gains from GST

Anyone manufacturing anything in India will tell you that the Goods and Services Tax
(GST) is the single most important tax reform. Indias manufacturing sector
contributes 16% to Indias gross domestic product or GDP. It is the biggest employer
after agriculture. Over the past two decades though, the growth in the manufacturing
sector has remained stagnant. Complex taxation and inadequate infrastructure have
stalled the march of a sector that is expected to create jobs.
GST is expected to eliminate complexities and the cascading effect of multiple taxes.
This, in turn, will provide a shot in the arm to the indigenous manufacturing sector. Latest
developments after the 11th GST Council meeting held recently suggest that the GST may
be rolled out from July 1, 2017, onwards.
A four- slab tax structure of 5, 12, 18, 28% has been suggested. The lowest tax rate of
5% will be applicable on items of mass consumption. These include tea, spices and
cooking oils. The two tax slabs of 12% and 18% will cover remaining manufactured items.
The highest tax slab of 28% is applicable to pan masala, tobacco, luxury cars and aerated
drinks. Here is the impact that the implementation of GST will have on the manufacturing
sector.

1. Reduction in production costs

Currently, manufactured goods in India are subject to multiple taxes at the state and the
central level. GST will do away with the multiple taxes that eliminate its cascading effect.
This will lead to a lowering of costs of production. As a result, indigenous manufacturers
can enjoy the benefits of a significant reduction in costs that also promotes the
Government agenda of making India a global manufacturing hub under its Make In India
programme.
 2. Removal of transport hassles
Currently, there are state border checkpoints that hamper the free flow of goods across
the country. Scrutiny at these checkpoints and location-based tax compliance result in a
loss of transit time for trucks carrying these goods. Implementation of GST will increase
the efficiency of Indian manufacturers by cutting down these unproductive transit hours
and assist the free flow of goods.

3. Savings of logistics costs

To avoid duplication of taxes at the state level, manufacturers have thus far felt a need to
own or lease smaller warehouses in Tier II and III cities. With the implementation of GST,
there will be a requirement for larger and fewer warehouses. As a result, smaller
warehouses can be integrated with larger ones in key locations. This will lead to space
optimisation and lower inventory carrying costs for the manufacturing industry.

4. Restructuring of supply chain

Supply and distribution modules were thus far structured by manufacturers to avoid
double tax incidence. With the implementation of GST, manufacturers can rethink these
modules on economic efficiencies and locational advantages rather than focusing on tax
arbitrage.
5. Shift from unorganised to organised segment
Another positive impact of GST implementation will be the migration of manufacturers in
the unorganised segment moving towards the organised segment. This migration will
prove to be beneficial especially to smaller manufacturers who will gain not only because
of a simpler tax regime to adhere to in the organised sector and will but also witness
increased demand. Manufacturers in sectors such as ceramic tiles, plywood and batteries
will stand out as winners.
Bottomline
Overall, the implementation of GST is expected to significantly reduce the cost of
transactions as well tax compliance for the manufacturing sector. This will lead to the
facilitation of ease of doing business in the long. While there may be some short-term
hiccups in the implementation of GST that may bring inconveniences to the fore, in the
long run, the manufacturing sector is expected to improve efficiencies and increase its
contribution to GDP.

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