Impact of GST on Textile Industry

Impact of GST on Textile Industry

The textile industry is an export oriented industry. It contributes 5% share of the world’s textile exports which amounts to US$ 40 billion. Currently a fillip is provided to the industry by exemption of taxes and duties on the exports. The textile industry is in favour of zero rating on exports under GST. They expect a proper refund system for the input taxed paid to emerge under the GST for textile exports.

In the current scenario there are usually low or zero rate of taxes on the final products. The current taxes vary from 4% to 12% on the various categories of textiles. Due to the lower rate, the tax is shifted back to production leading to blocked input taxes. Hence the cost of production is higher. The current taxation is production based which will be transformed to consumption based with the GST introduction.

The exemption is given to production inputs and is dependent on the size of operation. This has led to the breaking up of the industry. Any initiative to apply tax leads to major opposition from every segment of the textiles industry. All this is likely to be addressed in the GST where a single rate of tax is proposed for all goods and services. Also the exemptions will be replaced by Zero rating for exports.

There are also a number of disputes in relation to the current taxation. The fabrics versus garment classification, differential taxation for cotton and manmade fibre, and composite mills taxed at a higher rate than the power looms are plaguing the industry. The GST will be a uniform rate of tax for such disputed items and likely to amicably settle the disputes.

The textile segment is divided into nine broad categories at present for the purpose of taxation. Examples are cotton, woollen and silk textiles etc. The current structure of inputs can be broadly classified as textile inputs and non-textile goods and service inputs. In most of the categories the former varies from 40~50% and the latter is the balance. The tax compliance is likely to improve for the inputs and also result in tax credit to the textile company under the GST.

The textile industry feels that the GST around 12% would be a good effective rate and in line with the current rate of taxes. Two agencies namely Price Waterhouse Coopers (PWC) and Wazir advisors have been roped in by the Clothing Manufacturers Association of India to prepare a representation to the Government of India for the inclusion of ready-made garments in the “Merit List of GST.” Since there is a talk of GST rate to be around 24~27%, inclusion in the merit list will entail a lower tax on the readymade garments. The industry fears that a higher tax incidence at the consumer end is likely to increase costs and impact growth.

Thus, the textile industry has high hopes from the GST. A number of issues are likely to get addressed automatically with the roll out of GST. For the others steps have to be initiated now to sort them out in time before the GST gets implemented.

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