From July 1, with the advent of GST, India is witness to a historic transformation of numerous, inefficient, complex indirect taxes into a single tax regime to promote ‘one nation, one market, one tax’ regime. GST has been promulgated as a facilitator for improving the index of ‘ease of doing business’ as well as an economic booster that could push India’s growth.
The government has been actively promoting its flagship ‘Make in India’ campaign through various measures, with the aim of attracting foreign investment and encouraging domestic manufacture of goods. With the arrival of GST, the campaign is expected to gain impetus and stimulate growth in the manufacturing segment.
It will be interesting to see how domestic manufacturing pans out in the coming years vis-à-vis imported market under the GST structure. GST law clearly brings with it reduction in cascading taxes, availability of enhanced and seamless credits with both segments, domestic manufacturing and import-sale model, expected to reap benefits.
As import costs reduce, domestic production may face the impact. Where certain components of customs duty earlier applicable on import of goods have been subsumed under GST, it will be interesting to analyse its impact on cost of importation.
Under the erstwhile regime, countervailing duty of customs (CVD) and special additional duty of customs (SAD) were imposed on imported goods to balance the excise duty and value added tax, respectively, applicable on sale of similar domestically manufactured goods. This resulted in cascading of taxes on imports since the import traders were ineligible to take credit for CVD payable at the time of import.
Further impact of cascading levy occurred when such imported goods were sold to distributors located in other States, since such sales were further subject to Central Sales Tax, which was also non-creditable. This resulted in a form of (unintended) protection to domestic manufacturers to the extent that imported articles were marred with duties and taxes, which added to their cost.
With the onset of GST, except basic customs duty and applicable cess, no other duties (except GST) are applicable on imports. Further, GST payable at the time of import is allowed as credit to such importers, which could be used to pay GST applicable on further supply of such imported goods anywhere in India. Thus, to an extent, domestically manufactured goods lose the existing protection in terms of taxes vis-à-vis their counterparts following import-sale model.
ChallengesWhere the costs of imports come down, the challenges for domestic manufacturing industry could mount and the focus would be its competitiveness, moving away from the transaction tax arbitrage. There has been growing concern on rise in imports not keeping pace with manufacturing, leave alone manufacturing for exports, barring specified categories such as automobiles, its components and others. GST could benefit the imported goods as well, thereby creating a possible level playing field between the two, this could be a setback for domestic manufacturing in the long run.
However, on the bright side, since GST conforms to a global system of taxation, India has an opportunity to emerge as a lucrative location to set up manufacturing facilities. Other factors such as ease of compliance, tax structure based on global standards, uniformity of tax policies and rates across the country will instill higher confidence among investors. However, as far as discontinuation of protection against imports is concerned, the Government should reconsider the import duty structure for end consumer products to further incentivise domestic production in certain sectors.
On the supply side, presently the goods exported out of India usually have tax costs embedded in the price due to cascading of taxes on procurements of raw material and no facility of offsetting the credits under single tax law against the other. GST has established a uniform tax structure across the country leading to tax neutral movement of goods across the state borders which will sharply reduce the cascading of taxes.
Thus, goods under GST regime can be exported from India without exporting the tax costs embedded therein. This should make India’s indigenously manufactured products attractive in the international markets and could provide thrust to the ‘Make in India’ campaign. Recent announcements also indicate that the foreign trade policy will be tweaked to align with GST. This should further boost exports of domestic commodities.
On an overall basis, GST in times to come, should act as a catalyst for ‘Make in India’ campaign by providing a simplified tax structure. This should boost the financial viability of indigenous manufacturing to a great extent from an indirect tax perspective.
While the fate of domestic goods industry vs imported goods remains to be seen, implementation of an ambitious tax reform, which required collective efforts by several State Governments and the Central Government, has been exemplary in putting India on robust map.
The writer is Managing Partner, BMR Legal. With inputs from Sheena Sareen, Associate Director and Himanshu Gupta, Senior Associate