Impact of GST on manufacturing and trading process

[atul rathod]

Background:-

As we all know Model law of GST has come in public domain and bill has been passed in Rajya Sabha and expected to get effective from 01.04.2017. The purpose of this article is to give overview on impact of GST on manufacture and Trader due to change in Indirect tax structure.

Positive Impact on Manufacture

1. One Tax: In Present structure of GST, there is various kind of taxes such as excise duty, Service tax, VAT, Entry tax, Central Sales Tax etc. But in GST Regime there is only one tax i.e GST however, there will be three parts such CGST, SGST, IGST. This is measure relief for the manufacturer.
2. Rate of tax: In current tax regime the consumer pays approximately 25-26% more than the cost of production due to excise duty (at 12.5%) and value added tax (almost 14.5%) though there hasn’t been any indication of a GST rate, but experts suggest between 18% and 22%. Ultimately goods may become cheaper marginally which a good sign for manufacture to compete with international market. However, it may lead in opposite way if the excise duty and Value added tax is levied at shorter rate on some goods like small cars etc. The Impact of rate of tax depends on industry wise, but mostly it is beneficial.
3. No Concept of Manufacture: In Non-GST Regime the biggest litigation and issues are whether the transaction amount to manufacture or not. The interpretation related to term “Manufacture” will no more be relevant. It may result in ease of doing business without having litigation about the process.
4. Reduction In Cost: In Non-GST Regime there will be reduction in Cost of production as Credit will be eligible of tax on purchases made from interstate purchases and no cascading effect. Hence, A Manufacturer need not take the decision regarding purchase from point of view of tax implication as Credit is eligible on all purchases.    
5. Minimization of Classification issues: In current regime of tax there are numerous issues on classification of goods due to separate rates on different goods and exemptions on certain goods. But in regime of GST there shall be minimization of classification issues due to uniform rate and less expected exemptions.
6. Speedy Movement of Goods: In GST Regime of tax structure there will be minimization of trade barriers, such as filing of way bills/entry permits, Compliance under Entry tax will be abolished. There is much compliance in current regime on interstate movements or locally such as way bills, statutory forms etc which lead to slow movements of goods Where as this concept is going to be abolished though check points will still be eligible.
7. CENVAT Credit: In Regime of Present tax, the manufacturer is unable to utilize the credit of Central Sales tax and VAT provided output is charged under Composition Scheme, which becomes the Cost for him. But In Regime of GST, A Manufacturer will be eligible to take Credit of SGST (Earlier VAT) as well as IGST (Earlier CST) on the purchases. There will be seamless flow of Credit in GST.  
8. Valuation of Samples: In Current law Goods removed on Sample basis, tax needs to paid by adopting the nearest aggregate value. However, In GST Regime, time up to six months is granted to decide whether the good sold on sample basis has been approved or not which beneficial thing for manufacturer. However, after 6 months tax needs to be paid if the same is still in process of approval.
9. State Wise Registration: Generally it has been observed that many manufacturers have two premises of factory within same locality or in same state and they are liable to take separate registration for each factory. But in GST Regime, Registration has to be taken state wise and not factory wise. This will abolish the difficulties which have been faced due to separate registration.
10. No assessment by multiple tax authorities: Generally A manufacturers are facing many difficulties in handling the assessments done by the Separate authorities for VAT, Service Tax, Central Excise, CST, etc. In GST Regime it is expected that assessment will be done by State authorities for SGST, Central Authorities for CGST, and Interstate authorities for IGST.
11. Electronic Mode for Forms: In current Regime of tax there is very much manual filing of documents such as initial declaration, Numbering of Invoices etc. But in GST Regime there will be less manual filing of documents and more through electronic mode. Further, the communication with department also could be through electronic mode.
12. Compliance:-In GST Regime huge Compliance would be there however, it could be negative impact as well as positive.

Negative Impact

1. Time of Supply: In Current Regime of tax the time of duty on manufacture attracts at the time of removal where as in GST Regime it will earliest of the four such as (Date of Issue of Invoice, Date of Payment, Date of Removal, Debit in the books of Receiver).
2. No SSI Exemption: In Current tax structure a manufacturer is eligible for SSI Exemption upto ₹ 150 lakhs if the turnover of previous year does not exceed ₹ 400 Lakhs. But in GST there is Threshold limit given only Upto ₹ 10 Lakhs which biggest impact for manufacturer who was availing SSI Exemption earlier. Further, It is to be noted that No specific threshold limit is given for Jeweler that means SSI exemption for Jeweler Comes down from ₹ 8 Crore to ₹ 10 Lakhs. In this case we have to see for further Notification.
3. Increase in Working Capital: In GST Regime of tax, stock transfer has been made taxable, which requires the huge working capital because the realization of tax going to be on final supply tills that It may block the Capital.
4. No Credit of Petroleum Product:  In Regime of GST, Petroleum Product has been kept out of GST hence; the tax paid on Petroleum Product is not eligible as credit and same became the cost. Each industry requires the Petroleum Product such as Fertilizer Industry, Power Sector, Logistic Sector etc.
5. Introduction of Reverse Charge on Goods:  In Current Regime Of tax structure there was reverse charge on specified services but in case of GST even the reverse charge will be applicable on goods.
6. Post supply Discount: If the Discount has to be given post supply than it must be known to both the parties at the time of supply or pre-supply and the proof of being known is the clause of discount must be there either in contract or agreement or offer etc.
7. Matching Concept of Returns: In Current if the tax has been made the purchaser to supplier then he is eligible to take the Credit it is immaterial whether the same has been credited to Central Government by the Supplier or not. But in GST Regime, the matching concept if Tax Credit will be there, if Credits pertaining to Supplier does not match with Purchaser than it will not be accepted in return unless it is rectified by both the parties.
8. Denial of CENVAT Credit on purchases made from unorganized/unregistered Person: In GST Regime if the goods have been purchased from the register person then only Credit will be given otherwise the Credit will not be allowed.
9. No Compliance of “C” and “F” Forms:  As stock transfer has been made taxable in GST Regime hence Concept of “F” Forms is no more relevant and IGST has been levied on all inter-state purchases or sale and Credit will be allowed, hence No Concept of form “F” is relevant.
10. Increase in Compliance-burden : There is going to be huge Compliance burden in GST Regime such as 37 returns for one office in a year, No debit Notes, Credit Notes to be issues after 30^th Sep in succeeding year, Audit by Chartered Accountant after Certain limit etc.

Impact of GST on Trader-

Positive Impact:-

1. No dispute good Versus Service: In Present Regime of tax structure, the big issue is whether the transaction amount to sale of good or service. Though this dispute still may arise from view of Time/place of Supply from good or time/place of supply of services as both are separately given. However, net impact is neutral, on either of them needs to pay GST.
2. Composition levy Increased: In Current Regime of taxation the limit under Composition Scheme is ₹ 40 lakhs where as under GST it is increased upto ₹ 50 Lakhs. It is beneficial as ₹ 10 lakhs in turnover is a big thing from trader point of view. But currently it is 1% but in GST Regime it will be minimum of 1%, it could be more than that.
3. Credit of Excise Duty and Service tax: In Current Regime of taxation then a trader is not eligible to take Credit of input service as well as the Excise duty. However, In GST Regime he will be eligible to take all credits and it will make positive impact on trader.
4. No Margin to Disclose: Currently a trader who wants to pass on the CENVAT Credit of excise duty needs to obtain dealer registration and have to disclose the margin. But now this is no more relevant as trader is eligible to take Credit as well as no requirement of Separate dealer registration.
5. No Reversal of Credit on goods sent for stock transfer: Currently as stock transfer is not liable to Vat as well as CST hence, credit pertains to goods sent to stock transfer needs to be reversed. However, in GST Regime stock transfer got made taxable, hence No reversal of Credit is required.
6. Credit of CST: In Current regime of tax, on inter- state purchases CST paid became the cost to the trader as the Credit was not available where as under GST Regime it will be available as IGST Credit.

Negative Impact

1. Rates of tax:  Most of the traders are paying duty at the rate of 14.5% in current tax regime, however, after GST Comes they may pay around 18% which may be extra cost for them but on another hand they are eligible for various credit explained supra.
2. Stock transfer made taxable: In Current regime of tax, stock transfer are not taxable on being made available “Form F” where as in Current Regime stock transfer made taxable. Due to this Warehouse decision to be taken more appropriately.
3. No Form “C”: In Current Regime of tax, on being made available the Form C, CST rates charged at the rate of 2% instead of 14.5% which is local tax rate, however in GST Regime interstate will be taxed at standard rate i.e IGST.
4. Goods sent to job work are taxable: In Current GST Regime of tax, the goods sent for job work are not liable to CST on being made available of Form “H” whereas in Current GST Regime it became taxable.
5. Compliances: Instead of 12 Returns A Trader needs to file 37 returns in year and much more compliances which is similar to manufacturer as explained supera.

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Discussions to this article

[Ganeshan Kalyani]

The assessment part seems to be going to be difficult. The returns shall be filed in form GSTR 1, GSTR2 and so on. The return would have transaction of both SGST, CGST and IGST then how different authority i.e. state authority, central authority and interstate authority shall verify same return again and again ?

[yogesh Panchal]

Respected Experts,

1. In Present Law various type of concept for levy of excise duty, Like manufacture & deemed Manufacturer liable to pay excise duty on manufacturing of finished goods. Then non registered Traders purchased brought out material with duty payment but do not take credit for the same, also do not take any manufacturing or deemed manufacturing activity on brought out material, and brought out material cleared/sale without payment of excise duty with adding profit margin. Now in Model law of GST, The concept for levy of GST duty is on supply of Goods & service, then the brought out material sale without payment GST?
2. Now in Model law of GST Transition of credit existing as at last date of existing scheme Cenvat credit or VAT credit as per the last return would get transferred to “GST electronic credit ledger account” of the taxpayer. If any amount is not claimed in the last return then it can’t be claimed under GST regime. But In present law many credit not appeared in the returns, like in case of litigation, many assesses paid duty/service tax “under protest” Amount paid against conditional stay, Pri-Deposit at filling commissioner appeal as well as tribunal appeals, also in case of disputed service, assesses take credit and revert the duty/service tax “under protest” in the sane month to minimize litigation & Interest liability.

How above type credit/balance we have carried forward in records & last returns before

implementation of GST Law?? We have take credit in current law.

Please Guide in both queries.

[atul rathod]

Ganeshan Kalyani: Dear Sir,

No Provision regardig Scrutiny of Return is given in Model GST Law. In my Article i have mentioned about assessment which will be done by one authority up to certain limit and if turnover of the business cross that limit than it will be done by another authority. As per my view the assessment of Return would be done by only one authoity which would be common for state as well as central but still we have to wait and watch for the law with regard to assessment of Return.

[atul rathod]

yogesh Panchal :- Dear Sir,

w.r.t 1st query:- Earlier the Non-registered dealer under the excise was charging the VAT or CST as the case may be while selling the goods to customers. But in GST as the levy is on supply which includes sale, he need to charge CGST as well as SGST if it is intrastate sale and IGST if it is inter state sale. Further, he would be able to get the total credit.

w.r.t 2nd query:- One of the coniditon fot availing credit condition is credit should be eligible under the earlier law as well as in current law. if the proceedings were decided in favour of assessee he would get refund of tht credit in cash otherwise it would lapse. So the credit lying under the litigation, pre-deposit fees, reversed under protest would be refunded in cash if the same is held to be eligible by result of final proceedings. (See Sec 155 of model GST Law Transitional Provisions)

[Ganeshan Kalyani]

Thanks for your reply sir.