The manufacturing sector of any country is a major economic driver for the developing economies worldwide. However, unlike others, India’s manufacturing industry is still improper with the others and the performance is been humdrum.
Despite of having favorable demographic and geographic position as an advantage, it has not been able to capitalize. A sophisticated tax structure, incomplete infrastructure, and bureaucracy shrinking its capability to perform well on a global scale deluge the manufacturing sector in India. As per the sources, the manufacturing industry in India has been close to saturate for the last two decades with only a 16% share of GDP.
Also See: ROLE OF ARTIFICIAL INTELLIGENCE IN FINANCIAL SERVICES
However, the manufacturing sector might be revived under the focused efforts of government and by an implementation of GST regime that could even lead to experience a paradigm shift from an agrarian economy to manufacture and service based economy.
For India, becoming a manufacturing hub will need various strategic reformations to untangle the existing system in the country. One of the much-publicized proposed reform “make in India�? scheme initiative taken by the government is aligning with the implementation of the GST.
EFFECT ON MANUFACTURING SECTOR:
PRODUCTION COST WILL DIMINISH
There are many other advantages of new GST administration and one of them is reduced cost of production that is expected to be spurred by tax reduction. Another advantage of GST administration is non-accessibility of union or central tax credit over state taxes and vice versa can be purged. This is going to be done by giving access to unrestricted tax credit. Even if there is 2% lower tax rate in GST it will increase the profitability of the Manufacturer by 10%.
Example: Suppose a manufacturer of say, footwear buys a raw material or inputs like leather, lace, buckles, tailoring equipment worth Rs.100, a sum that includes a tax of Rs.10 with these manufacturing inputs of a footwear. 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).
At a tax rate of 10%, the tax on an output of the footwear will be then Rs.13. However, under the GST, he can set off the tax against the tax he has already paid on raw material (Rs.10). Therefore, the effective GST incidence on the manufacturer will be only Rs (13-10= Rs.3).
CONVENIENT SUPPLY OF GOODS
The checkpoints at the state border, which are scrambled with material scrutiny and location, based compliance lead to unproductive production, logistic time and transit hours aligning with regulatory obstruction reduce the productivity of Indian manufacturers compared to their international counterparts. The new GST model will unify the Indian market and assist the smooth flow of goods within the country.
REFORMING OF SUPPLY CHAIN MANAGEMENT
Three prospects of GST- an additional 1% tax on supply of commodities, the supply of goods and services to oneself and input tax credit on inter-state sale may compel the necessity for supply chain restriction. According to the constitution 100th Amendment Act, 2015 related the differentiation between “supply to oneself�? and “supply from one person to another�? and the additional tax should only be levied in cases where is a consideration i.e., supply to self should not be covered within its ambit.
Availability of input tax credit on state supply of goods and services may lead to warehouse re-engineering that can remove an extra level of warehousing in the supply chain, hence leading to greater cost benefit.
Also See: EXPLORING DIGITAL TRANSFORMATION IN THE CHEMICAL INDUSTRY
AREA BASED EXEMPTIONS
The rolling out of GST will send out positive signals to the world and the country is going to be seen as a unified market. This will make territory based exemptions seen currently will lose their distinct importance.
Hence by the looks of it, GST will have to be considered a boon. GST is practiced across the world and has been in the wings for a long time. This itself is a proof enough that GST had to be implemented sooner than later. Like any path breaking change in the system, GST will also come with its own sets of cons and prominent pros!