How GST could harm India’s nascent manufacturing industry

dark side of gst

The Goods and Services Tax (GST) regime, which was implemented on July 1, is a topic of hot debate between finance experts and business amateurs. The newest tax reform also has several people worried about its impact on their budgets. While several economists have covered the advantages and the positive-negative change in price quotients, let’s look at the dark facets of the new tax.

Let us look at the basics first. GST is a destination-based tax levied on consumption, which is meant to replace all indirect taxes like VAT, Customs Duty, Excise, CST and more. That means that the final goods and services won’t be subjected to several levels of taxes from both the central and state governments. One would take it to be a great idea, considering the current scenario where additional taxes significantly increase the cost of the most basic goods.

However, there are some goods and services that will face the brunt of the tax. Let us look at the few shortcomings of the tax implementation.

GST comes as a mid-year measure. So, for the fiscal year 2017-2018, the first three months would run on the older tax structure. This would make businesses run both tax systems parallel, resulting confusion. Other than that, there is the compliance constraint.

GST applies to several nascent sectors and services in the country. The secondary sector – Manufacturing and the Tertiary – services are the most compliance exclusive in GST. That means several types of business will have to fill up more forms, change their taxation systems, go through a lot of red tape just to get started.

This serves as a deterrent to online businesses, e-commerce operators and low budget garage-based ventures. Earlier they could just start a business, generate revenue and employment, and become a business. After all, several e-commerce giants today operated in the same manner. Now with GST, even freelancers would have to face legal compliance burdens and undergo a compulsory audit.

This seems rather hastened and counter-intuitive for a country with a large demographic of students working and earning online. GST might dissuade youngsters from creating their own ventures, and limit innovation in the education sector.

Another blow for online businesses is that, GST will make it mandatory for all online service providers to register in each state, as there is no centralized registration. That means an increase in administration procedures, documentation workload and overall costs.

Talking about the manufacturing sector, the situation isn’t rosy either. In the earlier tax system, manufacturing businesses had to pay an excise duty on a turnover of Rs 1.5 crore. That limit has been curtailed to Rs 20 lakh. This means an increasing tax burden for the small manufacturing businesses. This move can cascade into a large catastrophe where manufacturing units in the country would have to shut shop or limit their production limits.

Now, as attractive as the impacts of GST might seem, limiting the manufacturing power of the country would harm the indigenous production units and cause chaos for the people employed by them. In a burgeoning online economy, GST seems like an initiative meant exclusively for Agriculture. Even India’s manufacturing capabilities and issues aren’t taken into account while formulating the tax regime.

In such a scenario, it is worth asking – is the primary focus of India’s economy still agro-based? Aren’t some facets of GST in direct contradiction with the prevalent digital gambit of the Centre? We wonder if there are any incentives for India’s manufacturing sector. Why aren’t there any anti-inflationary measures to control the economic outcome of GST?

These questions are important to adjudge the government’s focus and future of the country’s economy in globally turbulent times. And while GST would be beneficial in several areas, it does seem to have a dark cloud over its silver lining.

About the author

Rohan Mahajan

Rohan Mahajan is a writer, which considering where you’re reading this makes perfect sense. A strategist by profession, Rohan is a movie buff, a traveler and a voracious reader who also writes poetry.
Rohan was previously associated with a startup where he wrote about User interfaces, Technology and Analytics. A quick thinker, Rohan shatters opinions and constantly views things in a different perspective.

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