GUEST COLUMN - GST KNOWLEDGE SERIES
CA Sandesh Mundra & Pooja Jajwani
Manufacturing industry is very much in focus now-a-days. This is so as on one side Government wants to boost domestic manufacturing and on the other side, industry is expected to survive the two biggest economic reforms viz. Demonetization and GST.
However, looking to the present scenario, GST is expected to be favourable for the manufacturing industry. It is expected to eradicate the differences between local and international market. And thus will increase the quality of competition and in turn the quality of output. Exports are likely to become cheaper with the complete removal of the cascading effect.
It is expected that after GST, the prices of manufactured products will decrease by 10% to 12%.
Some of the interesting points about the impact on the Manufacturing industry are as follows:-
Ø Sale vs supply
Under the present system of taxation, incidence to levy tax is either on SALE or on MANUFACTURING. But GST will be levied on the event of SUPPLY. Sale covers transfer of ownership, risk and rewards whereas supply is a wider term which may even include mere transfer of possession in the course of business. This change is expected to bring within its fold the agency transactions, supplies between different verticals of the same business, supplies between two separate registered establishments of the same person and branch transfers into tax net. Thus each business will be impacted positively or negatively both on the profit and the working capital front..
Ø The Credit effect
Presently, a manufacturer has to pay a number of taxes. For example: - VAT, Service tax, Excise, Entry Tax, different import duties etc. The concern is that credit held in one tax cannot be adjusted towards output tax liability of another tax. In GST, all these taxes are likely to be subsumed and hence, manufacturers will save themselves from the tax cascading.
Further, under GST the credits would only be available if the corresponding taxes have been actually paid by the supplier. This matching of credit concept will reduce the possibility of tax litigation for credit claims.
Single levy on goods and services will encourage seamless flow of input tax credit.
Ø Place of supply
Currently we follow the origina based principle where the state of origin has the right to collect the taxes on transactions originating from that state. However that is not going to be so under the GST regime which has brought in the internationally recognized destination based concept. Thus it will now be very important to determine the state where the movement of the goods is terminating to decide which state gets the right to collect the taxes on a particular transaction.
Ø Distribution Strategies
GST is on destination based principal and tax on supply. Branch transfers are also taxable. Excise is levied on production. Hence, presently industries are located in those states which provide area wise exemptions on production. But this is not the case with GST as tax will be collected by the consuming state and not by producing state. Hence, existing manufacturers have to reshuffle there distribution channel in order to facilitate cost minimization in GST. This exercise is supposed to invite high capital expenditure.
However, the positive side to this change is that expected transportation and logistics cost and transit lead time will reduce.
Ø Maximum Retail Price (MRP) relief
Presently, excise for manufacturers on specified products is levied on MRP (cost of production with profit margin of all the level’s in distribution channel). GST will be levied on its production cost. It will have positive impact on manufacturing industry.
Ø Removal of cascading effect
Excise is levied on MRP. Further, traders are not allowed to take credit of excise duty. GST will be levied on production cost and even traders are allowed to take credit of GST charged by manufacturer. Hence, cascading effect is likely to reduce.
Ø Check Post
Removal of checkpost is a big sigh of relief especially for Manufacturers. Now industry can plan Just in time purchases. It will also save lead time and litigations.
Ø Exclusions from GST
Petroleum products are excluded from the purview of GST for a short time. Hence, for that time if any manufacturer has any natural resource as primary input then, the credit blockage will increase and it will have a negative impact on the cost and profit figures.
Ø Job-workers
Job-workers are exempted in GST provided inputs are received back within 1 year and capital goods are received back within 3 years.
Ø Captive consumption
Captive consumption will not be taxable in GST unless it comes from a separate registered place of business. Dicey issue is whether separate divisions in excise would be allowed to be treated as one place of business in GST? Can department argue - two divisions in excise will be deemed to be two places of business? In which case, captive consumption will be taxable
Ø Agents
Presently, Manufacturer have their own distribution network if it gives synergies. Eg.:- Mumbai Dabbawala’s six sigma distribution technique is there business synergy. It is possible with single registration in Producing state’s VAT and CST. However, in GST for own distribution channel, Manufacturer may be required to take registration in each state’s IGST. It will result into heavy compliances and rise in cost.
[Views expressed are strictly personal]