Top 5 GST Challenges of Manufacturing Industry
The manufacturing industry of India stands at an impressive growth trajectory, with manufacturing exports for FY22 reaching a staggering US$ 418 billion & overall contribution of 17% to India’s GDP. The government’s “Make in India” also has been a key driver towards this boom in the manufacturing industry.
But as the manufacturing sector is reaching heights and opening itself into new geographies and segments, a significant cause of concern for the manufacturing industries has been the ever-changing norms and rates of GST in India. It has yet to be a sail-through ride for the manufacturing units to adapt to the onset of the GST mandate.
Conversion of Unorganized Manufacturing Industry to Organised
The Manufacturing Industry of India is predominantly an unorganized sector where more labor workers or operational people are apparent. Adapting to the new norms of GST and becoming more tech-savvy, whether to file for GST compliance or generate e-way bills, e-invoices and inculcate reconciliation processes, is a big challenge.
This is why many manufacturing units were in a conundrum when the GST in India was introduced. Working on government software online and understanding the complexities of new GST reform became a task at hand. This led to much loss to the industry.
These small companies and micro enterprises were largely not registered pre-GST, so they weren’t paying any VAT. This led to tax evasion or cascading of tax. Post-GST, when these organizations came under the GST net, the manufacturing companies started paying GST. Still, a lack of formal knowledge of laws and operational skills led to higher compliance costs.
Impact on Supply Chains of Manufacturing Industry
The implementation of Goods and Services Tax (GST) has had a significant negative impact on the supply chains of manufacturing businesses. One of the significant challenges is the increased complexity of compliance and documentation.
The introduction of GST in India has resulted in a multitude of tax rates and a complex structure, making it difficult for manufacturers to navigate and adhere to the new regulations. This has led to delays in the movement of goods and increased administrative burdens, hampering the smooth flow of materials and finished products across the supply chain.
Higher Costs for Manufacturers
The GST In India has resulted in higher transportation costs as companies must reroute their logistics networks to comply with the new India tax regime. The cascading effect of these challenges has put a strain on the efficiency and profitability of manufacturing businesses, affecting their ability to meet customer demands promptly.
Another factor to consider is the increase in working capital due to GST paid on raw materials & products, which can later be claimed as an Input Tax Credit. Additionally, the branch transfers are also made taxable under GST now.
Alongside this, the cost of hiring a dedicated compliance manager who knows the technical expertise and legal checks to ensure no penalties are imposed makes the GST regime more costly.
Frequent Changes in GST Rates Bring Complexities
Manufacturing companies have worked mainly on paper-based compliance solutions till the introduction of GST. After GST in India was introduced, the India tax rates kept changing, making it difficult for the manufacturing industry to navigate in a streamlined manner.
Furthermore, various segregations in the multiple taxes implied on different raw materials make the GST system even more challenging to imply with.
E.g., For furniture manufacturers, the cost of GST on various raw materials is entirely fragmented, as mentioned below.
Wood pulp, wood boxes, bamboo pulp, and related raw materials- 12% GST
Wooden furniture and decorative items- 12% GST
Residual items from the wood manufacturing process, wood tar, resin acids, and vegetable pitch, among others – 18% GST
Plywood, cane furniture, and other look-alikes of actual wooden materials- 28% GST
Waste of wood, wood in chips, etc.- 5% GST
For manufacturers, it becomes complicated to understand these various India tax divisions, especially considering how manufacturing companies are still adapting to the online tax systems, like filing compliance to the actual payments, e-way bills, and e-invoicing.
Difficulties in Claiming CENVAT Credit for Manufacturing Industry
Manufacturing companies in India need help with claiming CENVAT (Central Value Added Tax) credit. The eligibility criteria for claiming credit are complex, requiring strict adherence to Indian GST laws. Maintaining and managing extensive documentation, such as invoices and bills of entry, is burdensome, especially for companies with complex supply chains.
Matching input tax credit with supplier details on the GST portal poses another challenge, with discrepancies leading to delays or rejection of claims. The reverse charge mechanism, where the recipient pays the tax on behalf of the supplier, adds complexity to accurately claiming credit. Manufacturers must navigate restrictions on eligible inputs, capital goods, and input services, potentially leading to errors or omissions.
Additionally, time limitations for claiming credit require manufacturers to be prompt and compliant. These challenges demand careful attention and adherence to GST regulations to ensure successful and accurate CENVAT credit claims.
Conclusion
The impact of GST reforms on the manufacturing industry in India is far-reaching, and they are still adapting to the new norms. For the industry to completely align with the government’s vision is a long road ahead but not impossible to cover.
Compliance software like GSTrobo also plays a vital role in eliminating these challenges and streamlining the process of e-way bills, e-invoicing, overall compliances, and reconciliations. It reduces human interventions, introduces smooth-running methods, and helps stay updated with India tax deadlines, resulting in more efficient and cost-effective compliances.
