Positive And Negative Impact of GST on the Manufacturing Sector Banner 1
CA Poonam Gandhi

Updated on February 15th, 2024

The consequential impact of GST on the manufacturing sector has been reshaping the way the whole industry works. It is one of the reasons why the introduction of the GST has been marked as the biggest tax reform in India. In line with that, the revolutionary impact of GST on various sectors has been equally transformative.

Due to the subsuming of various indirect taxation into one single tax, the ‘Simplification’ of taxes was the biggest expectancy in the manufacturing sector post-GST. However, the initial period of GST failed to cope with the same.

Positive Impact of GST on the Manufacturing Sector

When evaluating the impact of GST on service sector, manufacturing, or corporate, a crucial element is always the pre-GST return filing processes that took place in these sectors. Keeping that in mind, let’s now look into the positive impact of GST on the manufacturing sector:

Positive Impact of GST on the Manufacturing Sector

Reduction in Cost of Logistics

Reduction in the cost of logistics is a notable benefit to the manufacturing sector under GST. Seamless flow of goods from one state to another without the levy of multiple entry tax leads to cost-effective logistics.

Since the implementation of GST, the reduced cost of logistics directly contributed to an increase in profitability for the manufacturing sector.

Reduction in Cascading Tax Effect

‘Cascading tax effect’ simply means tax on tax. Under the pre-GST regime, taxes were levied at various stages of manufacturing and sale.

Such cascading effects have decreased under GST as the complicated tax structure is replaced with a unified one, leading to huge benefits for the manufacturing sector post-GST.

Convenient Inter-state Transactions

Inter-state transactions during the pre-GST regime involved the levy of various taxes, making the process highly complex. As a result, large manufacturing units had to tackle and handle these challenges, whereas small and medium-sized manufacturing units would usually choose to escape the inter-state transactions.

The inter-state transactions became quite simple post-GST. Hence, all manufacturing units (whether small, big, or medium) could go for the same without any hassles.

Additionally, the levy of the same GST rate (on the manufacturing sector) for inter-state as well as intra-state transactions enabled manufacturing units to select the supplier offering the best possible price.

Simplified Registration and Compliance Requirements

A new manufacturing unit (under the pre-GST regime), was required to obtain registration under various indirect tax laws like excise, sales tax, and VAT.

The registration requirement went down to one post-GST, needing only a single registration under GST.

With the decrease in the number of registrations, the corresponding compliance requirements also became easily manageable.

Reduction in Assessment by Multiple Authorities

In the pre-GST era, manufacturers had to deal with various tax authorities like excise, service tax, sales tax, and VAT. As multiple taxes were being levied, assessments were undertaken by multiple tax authorities. Resultantly, manufacturers (whether small or big) had to devote a lot of time to clear the assessment procedures as separate tax authorities were responsible for assessing different taxes.

As a single tax is being levied post-GST, the manufacturers now have to deal with only a single tax authority i.e. GST department. Thus, a lot of time being spent for assessment by multiple authorities is reduced drastically post-introduction of GST. It is considered the most beneficial impact of GST on manufacturers.

Negative Impact of GST on the Manufacturing Sector

There has been a positive and negative impact of GST on the Indian economy ever since its introduction. Various business owners have quickly adapted to the changing GST requirements to stay competitive, while some have had to face unfavorable consequences.

As a manufacturing business owner, knowing the answer to “what is the impact of GST” for your business should always be a priority, mainly the negative GST impact.

To understand, let’s now look into the negative impact of GST on the manufacturing sector
Negative Impact of GST on the Manufacturing Sector

Increase in Working Capital Requirement

Working capital plays a vital role in increasing the financial growth of any business.

Compared to the pre-GST regime, the working capital requirement is increased under the post-GST regime. Likely reasons for the same are GST tax levy in case of receipt of advance, stock transfer, and branch transfer.

Further, there are more chances of an increase in working capital requirement due to the blocking of input tax credit.

Complexity in Availing Input Tax Credit

Seamless flow of credit was the basic aim behind the introduction of GST. However, the availment of input tax credits has become a big headache under GST. Various conditions as well as matching of credit requirements need to be satisfied before availing input tax credit.

Effect of GST on the Manufacturing Sector

The manufacturing sector in India is regarded as the backbone of social and economic development. That is why both the positive and negative impact of GST on the manufacturing sector has been welcomed by business owners with open arms, to treat it as an opportunity for growth rather than an obstacle.

Reduction in logistics costs, easier inter-state transactions, and simplified registration & compliance requirements are some of the positive impacts of GST on the sector, whereas the increase in working capital requirement and dealing with the complexity of availing input tax credit are the negative ones.

In short, the introduction of GST has led to more positive and lurative outcomes for the manufacturing sector (than negative).

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CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer, with practical experience of 9+ years in the field of Indirect Taxation.

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