GST 2.0: Impact on manufacturing sector and expected benefits

The recent Goods and Services Tax (GST) reforms are expected to lead to a major transformation for the manufacturing sector in India. The revised GST structure, set to come into effect on September 22, is aimed at simplifying the tax structure, boosting consumption and empowering industries. The simplified two-tier tax structure approved by the GST Council earlier this month is aimed at expediting growth across industries, including the manufacturing sector.

The revised GST structure and simplified compliance process will boost competitiveness and free up capital for manufacturers across sectors.

The Goods and Services Tax (GST), introduced in 2017, replaced a convoluted system of indirect taxes. Since its launch, the GST regime has undergone multiple revisions.

Under the latest next-generation reforms, dubbed as GST 2.0, the government retained only two tax rates of 5% and 18%, compared to the four slabs earlier. The GST Council has removed 12% and 28% rates. A new 40% tax rate has been introduced for sin goods and luxury items under the revised structure.

After the implementation of GST 2.0, manufacturers across sectors like textiles, consumer electronics, automobiles, pharma and FMCG are expected to see a significant growth led by consumption demand.  Lower input costs and simplified compliance will also benefit the manufacturers across sectors, including the MSMEs.

Impact of GST 2.0 on the manufacturing sector

The GST reforms are aimed at empowering manufacturers and MSMEs with seamless cash flows and growth driven by demand.

“Next-Gen GST reforms build on GST’s success with a simplified 2-tier structure, fairer taxation and digital filing for ease and faster refunds. They prioritise consumers by lowering rates on essentials and high-value items, empower MSMEs and manufacturers with smoother cash flows, strengthen state revenues, and boost demand, driving consumption and manufacturing growth across India,” said a PIB release.

Manufacturers in industries like electronics, textiles, and fertilisers were forced to deal with an inverted duty structure for many years. This meant that inputs were subject to greater taxes than final goods, which locked up working capital, hampered cash flow and reduced the competitiveness of Indian goods. The revised GST structure will eliminate most of these limitations, ensuring improved cash flow and better access to working capital for manufacturers.

Across all industries, the manufacturing sector employs millions of people and accounts for about 17% of India's GDP. Pricing, competitiveness and output are all directly impacted by a simplified tax system. Lower pricing of products and reduced input costs will boost growth for manufacturers, driven by higher demand.

Here's a look at how manufacturers across various industries are set to gain from GST 2.0:

Automotive: Taxes on compact vehicles, two-wheelers, tractors, buses, lorries, and auto parts have been lowered from 28% to 18%. This reduces shipping expenses for the industry and lowers the cost of vehicles.

FMCG and Packaged Food: Reasonably priced staples will increase demand and consumption. Manufacturers stand to gain from volume growth driven by consumption demand.

Electronics and Durables: Lower tax inefficiencies will promote homegrown manufacturing and better support the government's "Make in India" initiative.

Renewable Energy: The GST Council has reduced tax rates on photovoltaic cells, solar panels and wind turbines to 5% from 12%. This will benefit the manufacturers in the renewable energy sector.

Textiles and Apparel: A uniform 5% GST on textiles and yarns facilitates exports and makes compliance easier, enabling Indian textile producers to more successfully compete in international markets.