Impact of GST on Business: Sector-wise Analysis

The launch of the Goods and Services Tax (GST) system in July 2017 was one of the pivotal moments in the economic history of independent India. This has literally turned the prevailing legacy indirect taxation system in the country on its head. For example, excise duty and VAT were charged at the point of production and sales, while GST is levied on the supply of goods and services. Such major shifts in indirect taxation have both negative and positive implications.  

This article provides a comprehensive analysis of the impact of GST on business in India across sectors. 

Impact of GST on businesses 

Sector-wise analysis of the impact of GST

The GST system has proved broadly helpful to the economy and businesses. However, the actual impact may vary widely from one sector to another. Let us analyse and understand the sector-specific effects of GST. 

Manufacturing 

Manufacturing as a sector is among the top beneficiaries of the GST regime. First of all, interstate movements of goods have become easier under the GST system, reducing logistics costs and improving access to cheaper raw materials. Conventional multi-layered indirect taxes had significant cascading effects on the costs of materials and final products. To remain competitive, manufacturers often needed to select suppliers based on tax implications instead of suppliers' actual capabilities. 

The GST regime removed such cascading effects. GST allows taxpayers to claim ITC irrespective of the business location of suppliers. Besides, significantly reduced restrictions on inter-state trades have opened the whole country as a single market for manufacturers. An entirely online GST taxation system has allowed large manufacturers to automate many taxation-related processes. This has allowed better control over such processes and reduced costs of compliance and auditing. 

However, the impact of GST on manufacturing is not entirely free from negativities. As an example, the GST system imposes high penalties on non-payment or delay in payment of collected taxes to the government exchequer. This often creates liquidity problems for companies, and they are required to maintain excess working capital. It increases the costs of financing working capital.   

Agriculture 

Agriculture is the biggest contributor to India's GDP and the sector employs the largest share of the working population in the country. Small agriculturists who cultivate their own land with personal, family and personally supervised hired labourers are exempt from GST. Besides, fresh fruits, vegetables, grains, pulses, and milk have been exempted from GST to avoid unnecessary increases in prices of essential commodities. So, people who cultivate formally with for-profit motives or perform cultivation through legal business entities are liable for GST registration. 

The long-term vision regarding the impact of GST on the sector is definitely positive. Reduced logistic costs and easier inter-state trades have opened up the country as a unified market for large farm producers. Farmers and agri-businesses can easily claim tax credits on their inputs. The GST regime has also improved transparency in indirect taxes applicable to farming. However, most Indian agricultural producers have limited technology prowess and access to modern technologies. The online GST system has caused serious tech adoption challenges for such taxpayers.  

Services 

The introduction of GST has brought in many welcome changes for service providers. First of all, it has removed tax ambiguities between goods and services. Earlier, software companies supplying packaged applications or software with hardware components needed to treat these components separately for taxation. It caused double taxation and an excess burden on the service providers. Choices between the applicability of VAT and service tax also created a lot of tax compliance issues. GST has resolved this problem by providing uniform treatment of goods and services. Besides, the GST regime also allows claiming ITC on services as inputs. This has helped service providers.  

However, GST rate rationalisation is still pending. As a result, many service-specific tax rates under GST are higher compared to tax applicable in the previous (pre-GST) regime. The availability of ITC for services as inputs has encouraged many service providers to register under GST, increasing the overall tax base in the sector. However, this has also increased the costs of compliance for small taxpayers. 

Retail 

The unified tax regime under GST has made sourcing easier for retailers from anywhere in India and also increased their market size. Retailers can supply anywhere in India without being concerned about state-specific tax implications on prices. They are no longer liable for multiple indirect taxes, like VAT, CST, and service taxes. The tax burden has also been reduced as taxes applicable to retailers are limited between 12% to 28% compared to 30% in the previous regime. Businesses engaged in retailing can also claim input tax credits under GST.