GST impact on Make in India

Introduction

Prime Minister Modi launched a scheme ‘Make in India’ to revive and boost the stagnant manufacturing sector which is in a status quo from decades. Manufacturing sector contributes around 16% of our GDP which is substantially below if we could compare it with the world. In China, manufacturing sector contributes to 36% percent of the GDP.

Currently, the system is not able to support the government will. The plague of the multiplicity of taxes, tax wars, excessive checks on every border of the state where 60% of the total transport hours are lost. Hence, to support the government‘s will, it is vital to transform the existing system. The government recognises the importance of the manufacturing sector and hence, launches various schemes, movement and tax incentives in order to achieve the target of increasing manufacturing share to GDP to 25% by 2022.

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Impact of GST

GST will have a substantial impact on the Make in India scheme or the manufacturing sector. To dream of a robust manufacturing sector, it is imperative to have a simple, less ambiguous taxation system and GST is one of those. GST will have the following impact on the Make in India scheme;

• ​​The cost of making:  From traditional to modern markets, one factor which has remained important is the cost. Whether you are an exporter, a service provider or a Chinese manufacturer, a low-cost product will always help you to penetrate the market effectively. The practical example is the reliance jio, a low-cost telecom service or the rise of e-commerce portals Flipkart, Amazon, etc. which are offering heavy discounts to increase their market share.
  The new GST regime will be greatly beneficial as removal of cascading effect of taxes may leads to lower cost of production. A lower cost of the problem will generate more profits for the companies and hence, supporting the Make in India campaign.

• Rise in investments: Investment and cost are inversely proportional. A reduced cost will always attract more investment. Companies all over the world choose the territory of operation where they have the smooth flow of operations with a lesser cost of production so that they can offer the quality product at a competitive price so that they can penetrate the global markets with ease.
  The proposed GST regime aims to provide that platform to the companies where a cost of production will be lower with freely transferable goods anywhere in the country. As a result, it may be possible that companies may start manufacturing in India and selling all over the world.

• Transformation of Supply Chain Economics: Supply chain economics will witness a paradigm shift as currently it has been designed in line with present indirect tax structure. Currently, the location of the warehouse is based upon the VAT rates applicable to the product in different states.
  However, under GST regime, tax rates will be uniform all over the country, and then the companies will redesign their supply chain in accordance with different economic factors like cost, time of delivery etc. This is why the GST is also called a business reform.

Here are some of the points on the flip side on the coin which will hit the Make in India vis a vis manufacturing sector;

• Working Capital requirement: Under the present regime, stock transfers are not taxed as they are not considered as sale. Under GST regime, the tax is on supply which includes the stock transfer. Hence, companies will need to pay tax on stock transfer.
  Though, they may be allowed to take the credit of the tax paid. However, cash outflow initially will add to the working capital requirement.

• Tax on free supplies: The concept of taxing free supplies lies in excise duty under the current system. Under excise law, excise duty once levied is indefeasible. Likewise, under GST if the goods or services are supplied then they will attract GST irrespective of the fact whether it involves any consideration or not.
  Currently, the advisement and marketing involve lots of schemes under which goods are distributed as free bees. E.g. Goods distributed as free sample etc. Now, these practices will be costly by 18 to 20% (whatever the final tax will be).

• Increased compliances: GST is often described as one nation one tax. However, it is incomplete.
  The complete phrase is “One Nation One Tax Different Registrations.”
  For any branch in any state, a separate registration will be required. E.g. if a company is operating from 15 countries, then 15 different registrations will be required. Worst more; each registration will be subject to independent compliances.

At the end, the proposed GST may not be ideal, but something is better than nothing. GST will certainly be a big value addition to make in India scheme, and the specific issue will be resolved with time.

Conclusion

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