The manufacturing sector is a driver for economic growth in most economies,but the growth of Indian manufacturing sector has been lacklustre.
The manufacturing sector is plagued by inadequate infrastructure, bureaucratic hurdles, and also, complicated tax structure. As such, India remains an agrarian economy with industry contributing only 16% of GDP.
The complex tax system has drawn back the progress of the manufacturing sector till now. The govt. has tried to find a solution by reforming the tax regime by introducing the GST (Goods and Services Tax).
The GST is an indirect taxation system, which will simplify the present tax system and subsume various indirect taxes into a single taxation system.
GST is a consumption-based tax, and its basic principle is to tax value addition at each level of the transaction. The tax that is paid on purchases is permitted as a credit against liability on income/output. It is levied on all transactions of services and goods. The businesses can search for the best gst softwares to simplify their accounting procedures.
Impact on Manufacturing
- Production cost
GST removes cascading effect of taxes. This will reduce cost of inputs and thus, production cost. Easy to use tax credit system will permit better accounting and cash-flow.
- Reduction of time and cost of transport
GST removes multiple checkpoints. Almost 60% of time and efforts for logistics will be saved that ensures faster delivery and more road hours. This will increase the competitiveness of manufacturer and reduce prices of goods.
- Less need for warehouses
The previous state-based indirect tax system needed manufacturers to set up local warehouses to save cost. GST will reduce the need for many warehouses. Such savings will help build up the capacity of manufacturing units. This will usher in Just in Time (JIT) philosophy of production and reduced wastage. A firm can take advantage of economies of scale by consolidating warehouses. This will result in improved levels of service at less cost in the overall supply chain.
- Less area based incentives
GST will remove all area-based incentive schemes. Thus, it will be attractive to open a business in all locations in the country.
- Availing of easy credit
By removing restrictions, service providers can make use of credit of GST/ VAT paid on procured inputs, which will finally get passed onto supply chain as savings on costs.
- Geography-based locations of business
The choice of setting up business/warehouses will now be based on geography rather than tax structure. Many new locations will emerge as attractive logistics or warehousing bases. These savings will pass into supply value chain and help in optimization of final product cost.
- More tax credit
The tax integration by GST will provide an additional benefit of providing credit for service tax paid by manufacturers. With GST, cost of all services, even logistics will be considered as value addition and manufacturer will gain the tax credit for service tax paid.
- Larger set-up of warehouses
With less constraint on location, manufacturers can club together warehouses and consolidate into one big warehouse with state-of-the-art equipment and facilities. With bigger warehouses, sizes of transport lots will increase, enabling bigger, more efficient trucks.
In sum, GST is expected to transform the Indian economy and provide a competitive advantage to the Indian manufacturing sector. The single market system in the economy is expected to boost its fortunes.