Impact of GST on Machine Tools Industry

For India, becoming a manufacturing hub will need various strategic reformations. According to many, the recent implementation of the Goods and Services Tax (GST) is one such reform and very much in-line with the ‘Make in India’ initiative taken by the government.

India is one of the fastest growing economies and a lucrative market for several global manufacturing giants. The Indian manufacturing industry is expected to play a pivotal role helping the economy to continue this growth momentum.

Machine tool industry is always referred as the back bone industry or the mother industry. Any country that has a strong manufacturing setup is also blessed with strong machine tool industry. The manufacturing sector of a country is said to be the major economic driver for the developing economies across the globe. However, as per the sources, the Indian manufacturing industry has been close to stagnant for the last two decades with only a 16% share of GDP.

Nevertheless, it is believed that the manufacturing sector might be revived under the focused efforts of the government and by the implementation of the GST regime that could even lead to a paradigm shift from an agrarian economy to manufacture and service based economy.

According to Vikas Khanvelkar, M.D, DesignTech Systems Ltd, “GST is an excellent and path breaking initiative by the government and once it is fully rolled out, all the ambiguities of tax applicability and rates will be removed. Issues of C forms, Octroi, LBT etc will be over. This will remove all the hassles of dealing with multiple tax authorities and will make tax compliance convenient for all the companies.”

Welcoming GST, Indian Machine Tool Manufacturers’ Association (IMTMA) says, “From an end-customer’s outlook the indirect tax cost applicable on machine tools was on the higher side, attracting excise duty and VAT depending on the state. Additionally, there was a cascading of taxes on account of levy of CST, input tax credit retention under VAT, levy of entry tax, octroi, local body tax, etc. up to the time the product reached the customer. This has been eliminated with the standard rate of GST at 18% for machine tools. It is expected that there would be a reduction in the overall indirect tax cost.”

Introducing standard rate and going away from indirect cost can lead to reductions in production cost and an increase in baseline profits. It may also provide headroom for price reductions, benefiting end-users. There are many other advantages of new GST administration and one of them is reduced cost of production that is expected to be spurred by tax reduction. Another advantage of GST administration is non-accessibility of union or central tax credit over state taxes and vice versa can be removed. This is going to be done by giving permission to an unrestricted tax credit. Even if there is 2% lower tax rate in GST it will increase the profitability of the Manufacturer by 10%.

However, IMTMA feels there is need to correct some anomalies in GST rates, whereby some industrial intermediates (for example, CNC system, ball screws, etc., which are critical inputs to building CNC machine tools) attract GST at 28% whereas the end products (CNC machine tools) are at 18%. The ideal situation would be to tax raw materials, intermediates and finished products at successively increasing GST rates (say 5%, 12% and 18%).

“Various kinds of machinery are falling under the 18 % bracket but some are also falling under the 28% category. So the financial impact of GST will vary from company to company. Initially, procedural hurdles will be substantial but it will subside over a period of time. Possibility to avail input tax credit for all the GST paid will surely add to the savings of the company. For manufacturing Industry like machine tools handling excise, duty matters is a very complex and time-consuming activity. This will be fully removed after GST and to that extent, it is good news for the machine tool industry. I can say that for the companies falling under 18 % category, GST is very good news, but for the companies coming under 28 % category, GST is a mixed bag,” opines Khanvelkar.

After the GST officially came into effect on July 1, 2017, India is now a “One Tax One Nation”. Even though there are positive vibes in the industry, we will have to wait and watch the real impact of GST on the machine tool industry.

– By Nishant Kashyap