The manufacturing sector of any country is a major economic driver for the developing economies across the globe. However, unlike others, India’s manufacturing industry is still scrambling with the others and the performance is been lackluster.
In respite of having favorable demographic and geographic position as an advantage, it has not been able to capitalize. A complex tax structure, inadequate infrastructure, and bureaucracy diminishing its capability to perform well on a global scale engulf the manufacturing sector in India.
As per the sources, the manufacturing industry in India has been close to stagnant for the last two decades with only a 16% share of GDP.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 simplify 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 goods and service tax (GST).
The new GST model will trigger a transformational change from a complex multi-structured indirect taxation system to a unified indirect taxation system. The idea behind the GST regime is to eradicate the current empowerment by the central government and state government to levy excise duty on manufacturing plus service tax on the supply of goods.
Under GST, tax paid on inputs can be set off against the tax payable on the output produced. This input credit set off operates through the manufacturing and distribution stage of commodity production and the tax is collected only at the place of consumption.
Impact on manufacturing sector:
Reduced Cost of Production.
This sector is one of the crucial and competitive industry and reducing the cost of production while creating value for customers remains a challenge for every business. The new GST regime will be a great salutary influence, as a reduction in tax cascading will lead to a lower cost of production.
For an instance, suppose a manufacturer of shirts 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. At a tax rate of 10%, the tax on an output of the shirt 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).
Hassle free Supply of Goods.
The checkpoints at the state border, which are tangled with material scrutiny and location, based compliance lead to unproductive production, logistic time and transit hours aligning with regulatory obstruction reduce the efficiency 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.
Reengineering on Supply Chain Management.
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.