16 January 2015
Impact of GST on industry Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high taxation structure has the tendency to render products uncompetitive in the international market or eats up large portions of the cost arbitrage available in manufacturing set-ups in low cost economies such as India. For instance, the manufacturing cost of most products in India is nearly half than in the west. But, the incidence of multistage taxation i.e. customs duty on imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by the State or local municipal corporations and related costs such as loss of tax credit, compliance and litigation cost chip away this advantage to the extent of almost 50 per cent.
Cascading impact of taxes on landed costs Let us understand the cascading impact of indirect taxes through an example of a typical value chain.
There are multiple incidences on taxes and cascading impact on the cost of finished goods.
a) Custom Duty + Counter Veiling Duty + Cess paid on imported Goods
Sales Tax / VAT paid on domestic purchases, which include the excise duty paid by the raw material manufacturer. Sales Tax / VAT are also charged on the excise duty element.
b) Excise duty on the cost of manufactured goods. So, this excise duty also gets levied on the sales tax element (or custom duty & cess) paid on raw materials imported as stated above.
c) Service Tax on Transportation
Sales Tax (CST or VAT) on the sales of Finished Goods cost, which also includes the excise duty elements, sales tax paid on raw materials and service tax paid on transportation. Practically, the sales tax at this stage gets levied on all the taxes paid in the previous steps.
Multiple warehouses, inefficient distribution Besides these tax implications, complex state-wise tax structures have serious repercussions on the manufacturers. Inventory and distribution decisions are based on tax avoidance rather than operational efficiency. Accordingly, most manufacturers maintain warehouses in different states to evidence movement of goods from one warehouse to another to save on the CST. Also, quite a few entities set up warehouses in locations like Pondicherry or Daman, often impractical from a distribution point of view, as the CST rate at such locations were previously lower than the rates prevalent in other states.
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