Temporary GST Relief for Industry

Context

India’s Goods and Services Tax (GST) regime, implemented in 2017, was envisioned as a transformative reform to simplify taxation, boost manufacturing, and create a unified national market. Recent record-high GST collections and a surge in manufacturing exports have brought temporary relief to the sector. However, sustaining long-term growth requires addressing structural challenges and leveraging global shifts in supply chains.

GST’s Impact on the Manufacturing Sector

Simplification and Subsumption of Taxes

• • GST replaced a complex web of central and state taxes (excise, VAT, CST, octroi) with a single, unified tax, streamlining compliance and reducing the indirect tax burden for manufacturers.
  • The elimination of cascading taxes-where tax was levied on tax-has lowered the overall tax incidence on manufactured goods, making Indian products more competitive.

Business Efficiency and Cost Savings

• • The ‘one nation, one tax’ approach has enabled manufacturers to optimize logistics and supply chains, reducing the need for multiple warehouses and lowering logistics costs.
  • Seamless interstate trade has become possible, enhancing operational efficiency and market access for manufacturers.

Input Tax Credit (ITC) and Compliance

• • GST introduced the Input Tax Credit system, allowing manufacturers to offset taxes paid on inputs against their final tax liability, reducing costs and improving profitability.
  • Digitization of compliance-through e-invoicing, automated filings, and digital audit trails-has increased transparency and reduced tax evasion, particularly benefitting MSMEs.

Positive Outcomes

• • Enhanced competitiveness due to simplified tax structure and reduced compliance burdens.
  • Formalization of the economy, with increased participation from small and medium enterprises, especially post-pandemic.
  • Record GST collections, with April 2025 seeing ₹2.37 lakh crore-up 12.6% year-on-year, reflecting improved compliance and economic activity.

Recent Export Surge: A Temporary Boost

Global Demand and Supply Chain Shifts

• India’s manufacturing sector witnessed a 10-month high in activity, driven by strong new orders and rising exports, especially as global businesses diversified away from China due to tariff risks.
• Major companies, like Apple, are shifting production to India, reinforcing its status as a ‘China-plus-one’ alternative for global supply chains.

Short-Term Factors

• The current export boom is linked to a temporary window-global buyers are fast-tracking orders from India ahead of the U.S. reimposing tariffs on Chinese goods in July 2025.
• This has led to a surge in export-oriented manufacturing and GST refunds, with exporters benefiting from streamlined digital refund processes.

Structural Challenges and Limitations

Sluggish Domestic Manufacturing Growth

• • Despite the export surge, India’s manufacturing sector grew only 4% in FY24-a four-year low-highlighting persistent structural bottlenecks.
  • The current boost is largely export-driven and not rooted in robust domestic demand, making it unsustainable for long-term growth.

Compliance and Working Capital Issues

• • While GST has eased many burdens, challenges remain, especially for smaller manufacturers:

• • Increased working capital requirements due to GST on advances and stock transfers.

• • Complexity in availing input tax credit, particularly when dealing with exclusions (e.g., petroleum products).

• • Initial adjustment difficulties for SMEs, though composition schemes have provided some relief.

Sectoral Concerns

• • Some sectors face higher compliance costs or are affected by the exclusion of key inputs from GST’s ambit (like petroleum fuels), which impacts manufacturing competitiveness.

The Way Forward: Ensuring Sustainable Growth

• Strengthening Domestic Demand: To reduce reliance on temporary export booms, India must focus on boosting domestic consumption and building internal market resilience. Policy support for MSMEs and continued formalization will be key.
• Trade Diplomacy and FTAs: Negotiating favorable terms in Free Trade Agreements (FTAs) can help Indian manufacturers access new markets and withstand global trade shifts.
• Deepening Digital Integration: Further integration of fintech with GST-such as wider adoption of e-invoicing and digital compliance tools-will sustain high compliance and broaden the tax base.
• Export Ecosystem and Logistics: Upgrading logistics infrastructure, export incentives, and faster refund systems will help Indian manufacturers capitalize on global supply chain realignments.

Conclusion

India’s manufacturing sector is experiencing a temporary respite, buoyed by record GST collections and a surge in exports driven by global factors. While GST has simplified taxation, reduced costs, and improved compliance, the current momentum is not rooted in sustained domestic growth. For long-term resilience, India must strengthen domestic demand, address structural bottlenecks, and leverage trade diplomacy and digital innovation to support its manufacturing ambitions.

Source: The Hindu

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