GST and Indian Manufacturing Sector

1. GST and Indian
Manufacturing Sector
By
Dr. C. RAJENDRAN., Ph.D

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 .
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