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GST and Indian Manufacturing Sector

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GST and Indian Manufacturing Sector

  1. 1. GST and Indian Manufacturing Sector By Dr. C. RAJENDRAN., Ph.D
  2. 2. What is Manufacturing Sector? The manufacturing sector is part of the goods-producing Industries. The Manufacturing sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products. Manufacturing holds a key position in the Indian economy, accounting for nearly 16 per cent of real GDP. Employing about 12.0 per cent of India’s labour force. Growth in the sector has been matching the strong pace in overall GDP growth over the past few years. Growth however has remained below that of services, an issue that has not escaped the attention of policy makers in the country.
  3. 3. Earlier Taxation System in Indian Manufacturing Sector The Indian Taxation system can be broadly divided into two major categories- Direct Taxes and Indirect Taxes. The nomenclature is purely based on whether the tax burden is borne by the payer directly or shifted to others. The Manufacturing sector itself is majorly governed by the Indirect Taxes regime. The Indirect Taxes are further named as Excise Duty, Sales Tax and Service tax.
  4. 4. Deficiency in the Earlier Tax System: The biggest problem with Indirect Taxes is prevailing since its inception. It is a well-known issue called Tax on Tax or Cascading Effect of Taxes.
  5. 5. GST - Brief History : GST was first introduced in France in 1954. In India , in 1974 the L K Jha committee first highlighted the need to move into VAT regime . In 1991 , Chelliah committee recommended VAT or GST implementation. In 1994, Service Tax was implemented in India In the year 2000, the Central Government under the Prime Ministership of Mr. Atal Bihari Vajpayee set up a model taxation scheme for a universal tax in India. In 2003, Haryana become the first State to implement VAT
  6. 6. In 2004 CENVAT was introduced to integrate Central Level taxes In 2006, Union Finance minister Mr. Chidambaram proposed roll out of GST by April 2010. In 2007, the report on GST submitted by Joint Working Group got accepted by the Empowered Committee. The committee released its First Discussion Paper (FDP) on GST in November 2009. In 2011 , Mr. Nandan Nilekani released Information Technology Strategy for GST. After several years of political drama, the Lok Sabha in 2015 passed the 122nd Constitutional Amendment Bill for GST. As per proposal, GST became effective from 2nd July 2017 in India.
  7. 7. GST around the world (Selected countries): 1. France There are 4 rates in France: 2.1 per cent, 5.5 per cent, 10 per cent and 20 per cent since its first implementation in 1954 2. United Kingdom Since 2011, UK's is set at 20 per cent 3. Ukraine There are two slabs in Ukraine, which are 20 per cent for most goods and services and 7 per cent mostly for medicines 4. New Zealand GST was introduced in New Zealand in 1986 at a rate of 10 per cent which was later increased to 15 per cent in 2010 5. Australia Introduced in 2000, the rate has been set at 10 per cent.
  8. 8. 6. Vietnam Three rates i.e 0 per cent, 5 per cent and 10 per cent are applied to most goods and services 7. Singapore Implemented at 3 per cent in 1994, GST was increased to 7% in 2007. 8. Malaysia Introduced in 2015, Malaysia's GST is set at 6 per cent. 9. Canada GST is set at 5 per cent on supplies of goods or services and includes most products.
  9. 9. What is GST ? The Goods and Service Tax system is an indirect taxation system . Merged into a single taxation system. It is a consumption based tax. The basic principle is to tax the value addition at each transaction. It is being levied on all transactions of goods and services .
  10. 10. Goods and Services Tax (GST) is an indirect tax which was introduced in India on 1 July 2017 and was applicable throughout India which replaced multiple cascading taxes levied by the central and state governments. The rate of GST in India is between double to four times.
  11. 11. GST is expected to fill the loopholes in the prevailed tax system and boost the Indian economy. This is being done by unifying the indirect taxes for all states throughout India. The tax rate under GST are set at 0%, 5%, 12%, 18% and 28% for various goods and services, and almost 50% of goods & services comes under 18% tax rate. But how is our life going to change post GST? Let’s see how GST impact on an end user’s pocket.
  12. 12. WHY GST ? 1. Removal of multiple valuations will create simplification: The old tax system subjects manufactured goods to excise duty, which was calculated differently in different states. While some states calculated excise duty based on transaction value, others calculated it based on quantity. For most manufactured goods’ excise duty was considered on MRP valuation. This created lot of confusion in valuation methods. GST – a transaction-based valuation, making calculation of tax much simpler for the manufacturer.
  13. 13. 2.Entry tax subsummation will reduce cost of production: The subsuming of the entry tax for inter-state transfers is a key reason for reducing cost of goods and services. 1. For example, a supplier of cement from Maharashtra to Karnataka was earlier required to pay entry tax when the supply crossed the inter-state border. For Karnataka, the entry tax rate was 5% of the value of the goods. The supplier would pass on this additional cost to the customer, resulting in increase in selling price. With entry tax being subsumed, the supplier need not pay the entry tax rate amount and consequently, not charge the customer this amount either.
  14. 14. Example: 2. Suppose a manufacturer of a shirt buys a raw material or inputs like cloth, thread, buttons, tailoring equipment worth Rs.100, a sum that includes a tax of Rs.10 with these manufacturing inputs of a shirt. In this process, the manufacturer adds a value to the materials he started out. Let us take this value added by him to be Rs.30. Now, the gross value of his good would be RS (100+30=Rs.130)
  15. 15. 3.Improved cash flows: Under the new tax laws, manufacturers can claim input tax credit on input goods, which seems to be a positive sign for cash flow. SMEs are keenly observing the time difference between input tax credit and the credit being available.
  16. 16. 4. Single registration process will provide ease of registration: The old regime required manufacturers to register each manufacturing facility separately, even those in the same state. GST will simplify the plant registration process by allowing single registration for all manufacturing entities within the same state. Previously, if a brick manufacturer had factories in Bangalore, Hubli and Dharwad, each unit had to be registered separately. Under GST, all of these factories would be jointly registered under the state of Karnataka. Of course, different state- entities will require separate registrations under GST too.
  17. 17. 5. Removal of cascading will lead to lower cost to consumer: The old tax regime does not allow manufacturers to claim tax credit on inter-state transaction taxes such as octroi, central sales tax, entry tax etc. This results in cascading of taxes—an extra cost to the manufacturing company. Manufacturers end up passing on these extra costs to the consumer. The unified GST regime will eliminate multiple taxes and thus lower cost of production; this, in turn, will mean lower pricing for the consumer. For example, prior to 1 July 2017, SMEs in manufacturing used to pay Excise Duty, Central State Tax and sometimes VAT too at 12.5%, 2% and 5.5% respectively. With GST in effect, they are required to pay 18% in taxes.
  18. 18. 6. Restructuring of supply chain: To align with the GST law, businesses will be required to realign their supply chains. However, this is a blessing in disguise. Till date, most supply chain structuring has been designed around how to manage tax regimes. With a single tax regime, this will change, and supply chain structures will focus on driving business efficiencies.
  19. 19. IMPACT ….? Footwear & Apparels/Garments: Footwear costing more than Rs. 500 will have a GST rate of 18% from an earlier rate of 14.41 rate but rates for the footwear below Rs. 500 has been reduced to 5%. So, you need to shell out more for buying a footwear above Rs. 500/-. And with respect to the ready-made garments, the rates have been reduced to 12% from an existing 18.16% which will make them cheaper.
  20. 20. Cab and Taxi rides: Now, taking an Ola or an Uber will be cheaper because the tax rate has come down to 5% from an earlier 6% for a cab booking made online. Airline tickets: Under the GST, tax rate for economy class for flight tickets is set at 5% but the tax for business class tickets will have a higher tax rate of 12%.
  21. 21. Train Fare: There will not be much of an impact. The effective tax rate has increased from 4.5% to 5% in GST. People travelling by local trains or in the sleeper class will not be affected, but first-class & AC travelers will have to pay more. Movie Tickets: Movie tickets costing below Rs. 100 will be charged a GST rate of 18% but prices above Rs. 100 will have a higher tax rate of 28%.
  22. 22. Jewellery: The gold investment will become slightly expensive because there will be 3% GST on gold & 5% on the making charges. The earlier tax rate on gold was around 2% in most of the states and the GST is increased from the existing rate to around 2% to 3%. Buying a Property: The GST rate for an under-construction property is 18% but the effective rate on this kind of property will be around 12% due to input tax credits the builder will avail of.
  23. 23. Education & Medical Facilities: Education and Medical sectors have been kept outside the GST and both the primary education & healthcare is exempt from GST. It means consumer will not pay any tax for the money that we spent on these services. But due to increase in the rate of taxes for certain goods & services as procured by these organizations, they may pass on the additional tax burden to the consumers. Hotel Stay: For your hotel stay, If your room tariff is less than Rs. 1,000, then there will be no GST, but anything above Rs. 5,000 will attract 28% tax.
  24. 24. Buying a Car: Most of the cars in the Indian market will become slightly cheaper, except for the hybrid cars because the GST rate will be 28% tax on all the vehicles irrespective of their make, engine capacity or model. However, over and above this 28%, an additional cess will be levied which can be either 1%, 3% or 15 %, depending on the particular car segment. Mobile Bills: People will have to pay more on mobile phone bills as GST on telecom services is now 18%, as against the earlier tax rate of 15%.
  25. 25. Restaurant Bills/EATING OUT: Now dining at five-star hotels will be charged at 18% GST rate and the Non-AC restaurants will be charged 12% and a 5% GST will be charged from small hotels, dhabas and restaurants who do not cross an annual turnover of Rs. 50 Lakh. IPL & other related events: Events like IPL i.e. sporting events will have a 28% GST rate which is higher than the earlier 20% rates. This will increase the price of your tickets. And the GST rate for other events like theatre, circus or Indian classical music shows or a folk dance performance or a drama show will be at 18% GST rate, this is lesser than the earlier tax rate.
  26. 26. DTH and cable services: The money you pay towards your DTH (Direct- To-Home) connections or to your cable operator will reduce a bit as the rate is fixed at 18%, which is lower than the earlier taxes which were comprising of entertainment tax in the range of 10% to 30%, apart from the service tax of 15%. Amusements Parks: The ticket price for amusement parks and theme parks will increase as the earlier service tax of 15% will become 28% under the GST.
  27. 27. Here’s is a list of some items which are completely exempted from the GST regime: *The unprocessed cereals, rice & wheat etc. *The unprocessed milk, vegetables (fresh), fish, meat, etc. *Unbranded Atta, Maida. *Kid’s colouring book/drawing books. *Sindoor/Bindis, Bangles, etc.
  28. 28. INDUSTRIAL IMPACT 1] FMCG [Fast Moving Consumer Goods Sector] Fast moving consumer goods sector will benefit from the GST due to the present of big unorganized market. GST rate for products like hair oil, soaps and toothpaste has been lowered Companies such as Colgate-Palmolive, HUL, Britannia, Heritage Foods etc will benefit from the move.
  29. 29. 2] Pharma and healthcare: Pharmaceutical products will see 12 per cent GST as against earlier rate of 10 per cent. Companies will be able to pass on this full impact to the patients. The healthcare sector will remain exempt from the GST however the inputs by the healthcare sector will be taxed at 18 per cent leading to rise in the operating costs.
  30. 30. 3] Consumer durables: White good players were previously taxed at 27 per cent (including 13.5 per cent VAT) against 28 per cent under the new GST regime. There are expectations that with GST coming in picture, there will be some increase in the prices of most consumer durable Items. However, market analysts do not see any significant impact on the margins of the consumer durable companies post GST implementation.
  31. 31. 4] Airlines Travelling in business class will become expensive as after the rollout of GST, tax rate increased from 9 per cent to 12 per cent. However, GST on economy class is set at 5 per cent, lower than the previous 6 per cent. Aviation Turbine Fuel has kept outside the GST and the indirect tax structure will continue. As a result, aviation companies will now face two set of taxes, i. e. GST and indirect tax. Tax input credit under the GST is only available on input services for economy class travel. Lower tax rate on economy travel is positive for companies like Inter Globe Aviation, Jet Airways and Spice Jet.
  32. 32. 5] Cement GST implementation is expected to be neutral for the cement industry. Earlier, cement was taxed at 12.5 per cent excise and VAT rates between 12.5-15.5 per cent. Under GST, the cement was taxed at 28 per cent, which is nearly the same as the current tax structure. Reduction in the prices of coal and GST will benefit cement companies further.
  33. 33. 6] Telecom The sector is facing severe pressure in the form of intense competition from Reliance Jio. Under the GST regime, telecom services will be taxed at 18 per cent as against 15 per cent earlier. There are expectations that it will work as a salt on the wound for the sector. Any price increase will further dampen the scenario.
  34. 34. 7] Automobile and auto ancillaries: The GST rates are mostly expected to be neutral to the auto sector except for the hybrid cars which will be taxed at the 28 per cent GST +15 per cent cess. Most other vehicle categories will not see significant change from the current tax structure. Tractors category will be taxed at 12 per cent against current 6-7 per cent which will be negative for the tractor companies.
  35. 35. 8] Real Estate The effective GST rate on under- construction real estate projects will be 12 per cent only and not 18 per cent as there will be abatement for land cost, according to a report by tax consultant . =