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Weaving it Right

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January 05, 2022

What is the issue?

Recent GST rate rationalisation in textile sector is a concern for already stressed MSME sectors.

What was the GST regime for textiles?

  • The manmade fibres (MMF) sector had an inverted duty structure with GST rates for  
    • Fibre and yarn – 18%
    • Apparel below Rs 1000 – 5%
    • Apparel above Rs 1000 – 12%
  • Inverted duty structure occurs when the tax rate on inputs is greater than the tax on the finished product.
  • In the case of cotton sector, the inverted duty problem does not exist. The GST rates were
    • Fibre and yarn – 5%
    • Apparel below Rs 1000 – 5%
    • Apparel above Rs 1000 – 12%

What changes did government make?

  • MMF Sector - The Centre had sought to correct the inverted duty structure of MMFs
    • All the finished product rates was raised to 12%
    • The raw materials (Fibre and yarn) rates were flattened to 12% from 18%.
  • Cotton Sector - To rationalise rates across the sector, the 5% slab was sought to be removed in the case of cotton fabrics as well.

What is the government’s rationale?

  • Rationalising and lowering rates would address the inverted duty structure problem prevailing in MMF sector and make Indian textile sector competitive.
  • Inverted duty structure build-up credits and cascade costs and block the crucial working capital for the industry.

How the changes are viewed by various stakeholders?

  • For Manufacturers the government’s decision appears to be a mixed bag.
  • For MMF manufacturers the decision seems good.
  • It will save a lot of working capital.
  • It will reduce the costs related to accounting.
  • It will help to resolve the input tax credit residues accumulate because of inverted tax structure.
  • However the representatives of other segments have expressed their concern.
  • For MSME sector that dominates the textile sector the decision is a concern.
  • It already faces decreased business due to pandemic induced closures.
  • Also there is a huge rise in the price of the cotton yarn (30%-40%).
  • This decision is expected to significantly increase their cost of production.
  • Hence it will be difficult to market the products.
  • Similarly manufacturers dependent on the cotton value chain also disapprove of the GST hike on cotton-based products.

What is the general opinion?

  • In the guise of correcting rate anomalies, the Centre and States had sought to raise the revenues.
  • However taking the short-term route to raise revenues through rate hikes will be an error.
  • A higher rate of taxes on inputs and finished products will lead to tax evasion.

What will be an ideal solution?

  • The ideal solution would be to keep all input and output rates at 5% while retaining the high-end fabrics at 12%.
  • This would be inflation-friendly and boost output.
  • However it would not be that acceptable to governments who are looking for a revenue boost.
  • Hence a GST of 8% for both input and output will curb prices without hurting production too much.
  • However this should be a temporary measure and the rate should eventually move to 5 per cent.
  • Lower and fewer GST rates across and within sectors should be considered the ideal.

Reference

  1. https://www.thehindubusinessline.com/opinion/editorial/gst-rate-rationalisation-in-textiles-needs-to-be-carefully-thought-through/article38115718.ece
  2. https://economictimes.indiatimes.com/small-biz/gst/completely-unjustifiable-gst-rate-hike-in-apparel-textiles-and-footwear-show-the-govt-has-no-easy-choices/articleshow/87923255.cms?from=mdr
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