The implementation of goods and services tax (GST) is therefore critical and necessary to give a boost to an already flagging sector,which is facing Multiple indirect tax legislation’s have led to significant compliance and administrative costs, classification and valuation disputes and generally impaired the ease of doing business in this sector.
a. State incentives and Area based incentives
b. Increased working capital
c. Free supplies
e. Reduction of cascading taxes
f. MRP valuation
a – State incentives and Area based incentives
Manufacturing units enjoy exemption of taxes based on their location in specified backward areas, capital investment etc and incentives offered by States under their respective investment promotion policies. Model GST Law does not clarify the fate of current incentives.
b – Increased working capital
Under the GST regime, stock transfers are deemed to be supplies and are subject to GST. Though GST paid at this stage would be available as credit, realization of this GST would only occur when the final supply is concluded. This would likely result in cash flow blockages and therefore companies would have to rethink their supply chain management strategies to minimize this impact on their cash flows.
c – Free supplies
Model GST Law stipulates that specific transactions without consideration would also be treated as supplies. Accordingly, free samples may be subject to GST, leading to increase in overall costs.
d – Discounts
The Model GST Law stipulates that post supply discounts are to be excluded from the transaction value, provided such discounts are known at or before the time of supply of goods and are linked to the invoices for such supply. Companies may need to analyse existing post supply discounts/incentive schemes where the quantum of discount is not known at the supply stage. Example, secondary market incentive schemes, volume based discounts etc.
e – Reduction of cascading taxes
Central taxes cannot be set-off against State taxes and vice versa. This often leads to a situation where manufacturers are unable to set off excess credit of central or state levies. Further, central sales tax paid on inter-state procurements is also not creditable and are costs for the company. All of the above issues are addressed under the Model GST Law, which permits tax set offs across the production value-chain, both for goods and services.
f – MRP valuation
GST is payable by the manufacturer at the transaction value, and is creditable for all subsequent resellers up to the final consumer. Accordingly, the unnecessary tax burden of the MRP regime will no longer be relevant.