GST Impact on Textiles industry & Apparels Industry: Impact of GST on Textiles Industry. The Goods and Service Tax (‘GST’), considered India’s biggest and most historic tax reform is just around the corner. To err is to perceive GST as just any other “Tax Reform”. GST signifies “Change” that too a Game changer!!
With the Government leaving no stone unturned to usher in GST on 01 July 2017, GST roll-out is going to change market dynamics by creating an integrated marketplace. This new taxation regime would not only require organizations to capture appropriate data for computation and compliance, but also presents a unique opportunity for cost optimization and cash liberation. The hitherto shadow economy in business would be forced to join the mainstream and time of fake bills could end. Unless tax is paid no one can avail credit and claim refund on exports.
Downside of Current Tax structure
- Multiplicity of taxes – Multiple taxable events – Manufacture, Sales& Services
- Cascading effect- Restriction in credit availment
- Varied compliances under statutes
- Different Compliances under varied states
- Lack of automation in SME sector
- Cash economy thriving in a big way
GST Regime Key Features
- One comprehensive levy on Goods & Services “ONE NATION ONE TAX”
- Shift to “Destination based Taxation”
- Common – taxable event -”Supply
- Increase in credit base –near seamless flow of eligible credits
- Improves business competencies with rewarding the honest and compliant.
Dual GST Structure
GST is levied by both the federal and state or provincial governments whereby a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of every transaction of supply of goods and services.
For within the state (Intra-State) supplies both CGST and SGST shall be levied with CGST Portion payable to Central Government and SGST Portion payable to respective state. For across the state (InterState) supplies IGST (CGST + SGST) shall be levied and collected by centre out of which the SGST Portion shall be transferred to respective consumer state
4 Tier Rate Structure
A four tier rate GST tax Structure of 5%, 12%, 18% and 28% with lower rates for essential items and the highest for luxury and demerits goods that would also attract an additional cess, have been decided by the GST Council
- 5% – Essential Goods
- 12% – Standard slab rate
- 18% – Standard Slab rate
- 28% – De-merit and Luxury goods
Key Industry Features (Source: Textile Ministry, Make in India)
Textile Industry in India is one of key sector in Indian economy with a direct linkage to the overall growth of Indian and global economy. Textile plays a major role in the Indian economy India’s textile market size (USD billion).
It contributes 14 per cent to industrial production and 4 per cent to GDP.
With over 45 million people, the industry is one of the largest source of employment generation in the country.
The industry accounts for nearly 15 per cent of total exports.
The Indian Textile industry is amongst very few industries that is vertically integrated from raw material to finished Products (From fibre to retail). With potential growth opportunities in both the global and the domestic market it has leveraged its strong manufacturing position to achieve considerable expansion
The Textile and apparel industry can be broadly classified into two segments:
- Yarn & Fibre (Natural & Man-made)
- Processed Fabrics, Ready-made garments & Apparels
Further, it is pertinent to note that there are in total 55 SEZs pan India for textiles and apparel industry.
Fore more details : GST on Textile Industry, Current Tax Regime on Textile Industry with Issues
GST Impact on Textiles industry & Apparels Industry
An important determinant of the tax incidence under GST will be the GST rate applicable to the textile segments.While the final GST rates are yet to be announced, even at the 12% lower rate recommended by the Dr. Arvind Subramanian Committee, the textile sector is likely to be negatively impacted. The cotton value chain is likely to be the worse affected as it is currently attracting zero central excise duty and tax in inputs may not be more than 2-4%.
- Revenue Neutral rate proposed to be higher under GST: Currently, the State VAT is 4.5% on apparels and with 1.2% effective central excise duty on branded garments with MRP of more than Rs 1000, the overall tax incidence on the finished goods, i.e. apparels is lower than 12%, which is the lowest rate being proposed in GST. This would be inspite of credit not being available for all tax/ duties paid in the past.
- Further the apparel retailers will not have sufficient input credits (such as service tax on rent of showrooms) to offset the increased tax liability if the GST is not levied on upstream sectors like yarn and fabrics and will be negative for retailers.
- Since there is a reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry towards manmade fibre. It may be noted that India currently operates with fibre mix of cotton: manmade of 60:40; as against global average of cotton: manmade of 40:60. Manmade inputs today suffer 12.5% + average 4/5% VAT which is a cost. In GST available as credit.
- Fiscal barriers for inter-state movement to be removed: Reduce time of movement and logistic costs, stocking costs and carrying costs.
- Promote capital investment:With textile sector coming under GST, textile players which are oriented towards domestic markets will be able to set-off the GST paid on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets.
- Duty Drawback to lose relevance : With Input tax credit chain becoming more transparent and integrated, the tax credit for exporters will become easier and full credit of indirect taxes can be claimed; and the duty drawback scheme, which aims to provide credit of indirect taxes could lose relevance under GST. However in the interim it would continue albeit at a lower rate.
- Increase in administrative cost for the textile industry as hitherto most of the activities were out of tax net.
- Improved compliances: An important effect of GST would be to improve compliance. The value chain under the GST will be fully traceable. As a result, ITC claims will have to be backed by full information chain of purchases and sales. Improved compliance will automatically lead to higher revenues for any given rate as long as that rate is not excessively high.
The expected rate of GST would be 12%. Net of credit maybe still 6-9%. To some extent final cost would increase. However GST would help exporters. The cash dealing would significantly reduce. The unorganized industry would not be advantaged. The compliant would find their goods competitive and this protected sector would also join in contributing to tax in addition to employment etc which was there even today. Stocking pre GST would reduce in this industry. Most smaller players whether in the textile processing, job workers, fabric manufacturers or garment units would have to bring in discipline in their recorded purchases and proper accounting which has not been strong in the past.
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