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31% chief financial officers (CFOs) feel GST rollout is affecting manufacturing sector the most, says a Deloitte survey

Aug 14, 2017

The Goods and Services Tax (GST) has been implemented and brings about radical tax reforms. One of its ramifications is for small Indian enterprises, including startups and SMEs, particularly those in the manufacturing sector. According to a survey by international audit and research firm Deloitte, over 31 percent of CFOs (chief financial officers) across different companies think that the GST implementation is challenging and is affecting the manufacturing sector the most. This is despite the fact that more than 54 percent of the CFOs feel that the impact of the demonetization drive has been neutral, as per the Deloitte Annual CFO survey.

According to another survey by the Indo-American Chamber of Commerce (IACC), organizations and companies of the manufacturing sector, including the small and medium enterprises (SMEs) as well as big corporates face increased tax under the GST. They say tax burden for manufacturing SMEs has increased after the GST rollout.

According to IACC Chairman, Finance Committee, SK Sarkar: “Small businesses in the manufacturing sector won’t have it easy in the GST regime. Under excise laws, only manufacturing business with turnover exceeding Rs 1.50 cr had to pay excise duty.”
Under the excise laws, no duty was paid by a manufacturer having turnover of less than Rs 1.50 crore. The GST, on the contrary, brings down the prescribed exemption limit to Rs 20 lakh. Therefore, a large number of SMEs and startups in the manufacturing sector see themselves come under the tax net. India has 50 million micro, small, and medium enterprises. Under the GST rollout and the turnover limit reduced to Rs. 20 lakh, there would be increasing tax burden for the manufacturing sector. Many companies would find compliance tough and will have to fall in line the requirements of the new regime.

National Vice President of IACC, Vasant Subramanyan, said in an interview: “Political expediency has led to a very high degree of compromise in the roll out of GST. It is understandable given the federal structure of India where there is panoply of taxes at the central, state and local levels. A large number of indirect taxes have been subsumed into GST. Yet, there are many incongruities both in the structure, uncertainties in the rollout and importantly in the impact, since a real time check at the initial stage indicates that prices of some of the goods having zero rates have gone up giving the impression that GST does not have the desired impact at least in the beginning.”
Consequently, a big chunk of SMEs and manufacturing-sector companies don’t think the GST is good news for the industry; they point out that there are disadvantages to this principle of equal treatment principle. The effect will be particularly significant for the SMEs who are already facing resource crunch.

“Earlier, we were not paying the tax, but after this policy comes into effect, I will have to bear the extra financial burden. My coir-making business may not remain profitable and I may have to look for other options,” said Dennis Jesudasan, a small business owner from Kerala.

Increased GST compliance costs for small enterprises

Moreover, there would be increased tax spends due to higher tax compliance costs if the manufacturing sector organizations comply with GST norms. There is an upfront additional cost to be taken into account. Businesses using enterprise resource planning (ERP) for filing tax returns, already have excise, VAT, and service tax incorporated. Compliance costs for SMEs will thus increase as the GST transition requires businesses to upgrade their ERP system software or buy new GST-compliant software, leading to overall increased compliance costs. They have to spend sizable resources on acquiring new ERP software as well as train employees on how to use it.

moreover, according to a survey by DynamicCIO among Indian CIOs, most of the respondents felt that the GST transition would take around 1–6 months (72.73 %).

“I expect lot of work for IT teams for the next 3-4 months, as there will be lot of learning that would need to be incorporated after the rollout. As users come out with more business scenarios that were not thought through during earlier rounds of testing, there will be work to be done. IT has to work to incorporate clarifications regarding various rules. On whether the data downloads and uploads will be as smooth as being projected by most ASPs/GSPs, I think one should just go back and look at most software implementations. Despite best of global vendors and multiple rounds of testing there are plenty of bugs,” says Vijay Sethi, CIO, Hero Moto Corp.

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