GST and the ‘Manufacturing’ Sector – The Challenges Ahead

By: Aradhana & Abhishek Kumar


The manufacturing sector of a nation serves as a base for its economy. The Union budget of 2015 focused towards the expansion of this very sector by means of various incentives and concessions but the important question, in this regard, is whether such steps on part of the Union Government could harness the “real growth” of this sector.

The 2015 budget officially marked the rise of the “Make in India” campaign of the Central Government with the backdrop of an expectation-driven market. However, the budget has been a mixed bag for the manufacturing sector despite the laudable credits it earned during its presentation. The budget of July, 2014 had acknowledged hurdles to the manufacturing sector and had promised a developmental saga. The 2015 budget tries to provide an amicable solution in the present state of affairs. One of the significant introductions brought about by the 2015 budget is the implementation of the Goods and Services Tax (hereinafter ‘GST’) from April 1, 2016. This aspect is of importance, for indirect taxes play a determinative role in augmenting the manufacturing sector. The GST envisages discontinuing all other indirect tax regimes in the nation and bring ease and uniformity in the tax policy. Being a progressive tax reformation, this scheme has aroused a lot of expectation from the manufacturing sector. However, the question remains whether the mere introduction of such a tax formula would provide the much-needed push in the manufacturing sector.

The Challenges Ahead

The efficacy of the entire GST regime will be determined by many variables including its structure, implementation and administration which in future will guide the manufacturing graph of the nation, and therefore, need to be scrutinized. One of the major criticisms which the budget has been subjected to is that since it is not streamlined and is devoid of clarity as to its procedural aspects, it will place the manufacturing sector in a limbo. Apprehension among states regarding the curtailment of their interests in taxes is something which needs to be addressed by the Union Government.

Another challenge which the Government faces is the task of ensuring an equitable tax policy for both ‘goods’ and ‘services’. This is relevant since the service sector is primarily responsible for driving the economy and manufacturing sector might face an unjust tax treatment. Further, in order to facilitate uninterrupted manufacturing and trade across boundaries, the Union needs to keep its GST structure in sync with the global standards. Further, the Union needs to overlook the credit policies and rules taking into consideration the existing international tax regimes and the object of boosting manufacturing.

The other impediment in speedy implementation of GST is the uncertainty with respect to aspects of economic activities which would constitute ‘manufacturing’. The scope of ‘manufacturing’ has been laid down by the Hon’ble Supreme Court of India on a case to case basis, leaving the Union bereft of an exhaustive definition of ‘manufacturing’. Therefore, if the Union Government earnestly intends to provide maximum benefit to the manufacturers, it first needs to define the scope of ‘manufacturing’. But an important question which arises in this regard is that what type of ‘goods’ should ideally be subjected to GST.

Another issue surrounding the implementation of GST is a constitutional one. India being a federal nation has balanced power in the context of imposition of taxes by the Union and the state. In light of this fact, the GST can come into existence only when the Parliament approves requisite amendments to the Constitution by a two-third majority and those amendments are ratified by more than fifty percent of the total number of states. Thus, a minimum consensus of the states would be required in order to turn this “dream tax” into a reality. The resistance of states to the constituents of ‘goods’ is something which the Union government needs to address with concerted efforts. The dispute regarding the inclusion of petroleum products needs an amicable solution and the fear among states regarding the loss of revenue also needs to be addressed.

One of the strong grounds of dispute between state and the Central Government following the GST was regarding the inclusion of ‘entry tax’ at the local body level, namely the ‘octroi’. The Constitution of India provides for freedom of trade and commerce throughout the territory of India and precludes states from taxing inter-state transactions. On the other hand, Article 304 of the Constitution allows state legislatures to impose tax on goods imported from other states or union territories. Therefore, entry tax was subject to litigation at all levels. However, the 122nd Constitution (Amendment) Bill, 2014 proposes to subsume all entry taxes including octroi and thereby proposes to omit Entry 52 of State List in the Seventh Schedule of the Constitution ending all the litigations.

The prime objective underlying the introduction of GST is to put into effect “one country, one tax” policy and mark an end to the multiplicity of taxes imposed. However, the bill proposes to amend Entry 52 of the State List and retain the power of states to levy entertainment and amusement taxes, thereby defeating the objective of such a uniform tax regime. Further, the term ‘entertainment’ is not well defined and includes a variety of activities. Therefore, the ambit of GST remains unclear in respect of the entertainment sector and it might subject the authorities to huge litigation in future. Therefore, there is a need to subsume the entertainment tax but the same still persists with the 122nd Constitution (Amendment) Bill.

Furthermore, the 14th Finance Commission in its report states that there is absence of clarity in respect of the structure of the GST and therefore, it is unable to estimate the revenue implications for the Centre. The commission although has promised the states full compensation for the first three years and subsequently, 75% for the next year, and 50% for the fifth and the final year.

The manufacturing sector suffers from a lot of impediments which arise from the structure of the nation. India ranks 142 among 189 economies in the ease of doing business at the global level. The causal factors include red tapism, unnecessary delay in getting permit among others which affect the manufacturing sector. Moreover, a lot of infrastructural projects which are initiated for the benefit of the industrial sector are never completed, which discourages the industrialists. In order to boost this sector, the country would need to raise its employment ratio by a huge margin.


The 2015 budget intends to lay the foundations of a GST which will be implemented as part of India’s dream of “common market, common tax regime” to boost the manufacturing sector, but the same looks uncertain with a lot of complexities and contingencies. There are several issues which need to be sorted out to finalize the structural and operational structure of the tax in order to aid manufacturing. The task is not easy essentially because of three reasons. Firstly, as the tax structure would emerge from negotiations of 32 actors (i.e. 29 states and 2 union territories), it would be unrealistic to expect a “flawless” GST’. Secondly, there are prima facie loopholes surrounding the scope of words like ‘goods’, ‘services’ and ‘entertainment’. These terms need to be defined for the sake of clarity and of course, to avoid the litigation. And thirdly, implications of GST, over the fiscal budget of the country, are not only the concern of manufacturing giants but also of the “Aam Aadmi”. It is therefore quintessential to set a firm structure of GST, the introduction of which needs to be considered as the starting point of a long reformation process in the economy rather than an event which will set its course on April 1, 2016.

(Aradhana and Abhishek are students in the fourth year of study at National University of Study and Research in Law, Ranchi.)