The last five years of the GST have seen many changes in terms of policy, tax rates, and procedural and technological overhauls, which have completely changed the face of the indirect tax system in India. Nonetheless, all the participants in the ecosystem – authorities, taxpayers, and tax experts – have evolved to keep pace with the changes.
The industry has done an overwhelming effort to ensure the adoption of the ever-evolving GST law in the last 5 years. The industry was required to not only keep track of the changing tax provisions but was also required to upgrade to a technology-based tax ecosystem. In this respect, efforts made by the government in terms of proactively issuing instructions, clarifications, and streamlining processes should be applauded too.
In line with industry expectations, GST has had a positive impact on the manufacturing sector by removing the cascading effect of taxes resulting in the reduction of manufacturing costs. Before GST implementation, certain taxes paid by manufacturers on procurements were non-creditable. At a dealer/ distributor level as well, credit of taxes paid on services (such as rent paid to warehouses, logistic costs, retail stores, etc.) were non-creditable. Being costs to the business, manufacturers and dealers/ distributors generally had no option but to in-build such costs into the sale price of the goods. With the embargo on credits being removed, there has been a reduction in manufacturing costs.
On the output side, manufacturing and sale of goods attracted Excise duty and VAT/ CST. Excise duty was generally levied @ 12.5% while VAT was generally levied at the rate of 12.5% or 5% and CST at 2% (in certain cases of inter-state sales). However, in GST only nearly 30 items, mostly luxury and sin items attract a 28% rate whereas the rest are mostly classified under 12% or 18%.
Before the GST, manufacturers were required to file multiple returns and were assessed by various tax authorities. With the implementation of GST, there has been the ease in undertaking compliances because of the automation of tax compliances. Also, the process of assessments and adjudication is expected to become smoother. The automation combined with the e-invoicing/e-way facility has not only positively impacted compliance management but has also started to show the result in revenue collection with the monthly collection constantly exceeding the 1 lakh crore for the last 11 months and reaching 1.68 lakh crore – the highest ever, in April 2022.
Unfortunately, by the time the Indian manufacturing sector could fully reap the benefits of a unified market, economic activity was disrupted by the pandemic. It exposed the fragility of the supply chain system not in India but across the world. Post the introduction of GST, growth in the manufacturing sector has remained subdued and the contribution of the manufacturing sector to the GDP has been constant from 15%-17%.
The manufacturing sector is again getting a boost from the Aatmanirbhar Bharat program and the PLI Schemes of the Central Government. These schemes are going to be pivotal, especially in the post-pandemic era, where companies have begun to reconfigure their sourcing, manufacturing, and distribution patterns. However, for the government to multiply the effect, the following issues should be considered promptly.
- GST on petroleum products – Industry participants across sectors have been echoing the demand to include petroleum products under GST which may further streamline the and reduce the product cost ultimately increasing in demand.
- Constitution of the GST Appellate Tribunal – GST Appellate Tribunal has not been constituted even after five years of GST implementation. In the absence of an alternative remedy, the writ has become the only option and high courts are flooded with them. Immediate constitution of the GST Appellate Tribunal and a fast-track adjudication process may provide relief to the assessees and the judicial system.
- Relaxation in ITC and rationalisation of rates – While the government is assisting the manufacturing sector in recovery after the COVID-19 pandemic, relaxation in availing the ITC on various inputs/ input services which are blocked currently combined with the simplification of the tax rate structure can further boost the sector.
As the economy recovers and foreign companies looking to explore a new base, on the fifth anniversary, we are at a crucial juncture in the GST journey. In case the government takes positive steps towards industry demands, India may emerge as a preferred nation for manufacturers and the economy may continue the growth story with strong collection post-pandemic.
(The writer is Tax Partner, EY India )