Impact of GST on Manufacturing Sector: Reforms, Benefits & Challenges

India is emerging as a manufacturing hub in the global supply chain. The Foreign Direct Investment (FDI) in the sector has increased by around 69% over the last decade. This trend can be attributed to government policies and the impact of GST on the manufacturing sector. After all, compliance with GST is essential for attracting investments and ensuring business growth in manufacturing. This article discusses how the introduction of GST helped manufacturers in India and what challenges still exist.

Key GST Reforms Affecting the Manufacturing Sector

Since July 2017, the GST Council has introduced several taxation reforms. The majority of these reforms aimed at the formalisation of indirect tax rates, administration and reporting mechanisms. Many of these changes have been generic in their impact on different industries. Some were manufacturing-centric. 

The broad reforms relevant to the manufacturing sector: 

Positive Impacts of GST on Manufacturing

The GST system has remained mostly positive for manufacturers. Some of the prominent positive impacts on manufacturing sectors are: 

• Reduction in the cascading effect of indirect taxation 

Inability or difficulty claiming credit for taxes already paid on inputs is a big concern for any manufacturer. It makes finished goods costlier and less competitive. The Input tax credit (ITC) mechanism in the GST system has made claiming tax credits easier. Taxpayers only need to have a tax invoice, supply receipt, and confirmation from the supplier regarding the payment of taxes. 

• Smoother logistics for an efficient supply chain 

Another big problem for manufacturers and distributors in the pre-GST era was transporting goods from one state to another. Complying with multiple checkpoints and tax nakas on inter-state highways, different documentation practices and entry taxes were obstructive to the movement of raw, semi-finished and finished products, and a nightmare for logistics. GST reforms have vastly removed these barriers. 

• Increased ease of doing business 

Domestic manufacturers earlier needed to deal with multiple indirect taxes at various rates, depending on their places of operations. Complying with these taxes required separate registrations, documentations, filings and administration practices. With GST, manufacturers require only one registration with the GST portal. Tax structure is uniform across the country. 

• Lower cost of compliance 

The overhead costs of managing indirect tax compliance have significantly gone down. From registration, filing tax returns, claiming ITCs, to managing supply chains seamlessly through mandatory e-way bill systems, the GST regime has made indirect tax compliance a lot easier than the legacy taxation structure. 

Negative Impact of GST on the Manufacturing Sector

Despite formalisation and simplification of indirect taxation across the country, many issues still exist that need to be solved. Micro, small and medium-sized businesses, unorganised sector manufacturers and startups still face challenges while complying with the GST law. 

• Technology hurdles 

A vast majority of India’s domestic manufacturers, especially those who are from traditionally unorganised sectors, are not comfortable with using digital technologies. They often lack the means to leverage these tools on their own. It creates a significant technology hurdle. 

• ITC-related issues 

Claiming input tax credits has become a lot easier compared to the pre-GST taxation system. However, actual refunds often get delayed if suppliers fail to comply or delay in transferring collected tax to the government. This creates a shortage of working capital, especially for micro and small manufacturing companies. 

• Frequent compliance updates

The GST Council tries to handle compliance issues dynamically. They make changes to rules and regulations based on emerging concerns. It is a practical approach to tax reforms in a large country like India with too many regional diversities. However, it also requires issuing frequent amendments with compliance implications. This causes trouble for MSMEs as they often lack in-house expertise or the capability to hire dedicated resources to handle taxation issues.  

• Problem with inverted duty structure 

Inverted Duty Structure is a big cause of concern for many industries within the manufacturing sector. This issue arises when the tax rate on raw materials and other inputs of production is higher than the applicable rates on finished products. It makes the tax liability on finished products insufficient to claim a refund on the tax paid on inputs. For example, finished garments attract 5% GST while synthetic yarns are taxed at 12% and 18%.  

Impact of GST on Specific Industries of Manufacturing

Many of the issues with the GST regime are being resolved through newer reforms and amendments. However, fresh challenges are also emerging. Let us have a look at the broader sector-specific negative impact of GST. 

Manufacturing is a key sector for economic growth and employment generation in the country. The GST regime has brought in many necessary changes in India’s indirect taxation landscape for manufacturers. The impact of ITC, e-invoicing and e-way bills are transformational. The Council is also open to consultation with stakeholders and adaptive to changing business realities and consumption patterns. So, the future remains positive for manufacturers of all sizes and sectors.