How will new Duty Drawback rates affect the garment industry?

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The Government of India notified new duty drawback rates on garment exports from October 1, 2017.

What is Duty Drawback Policy?

Duty drawback can be understood as the refund of the duty that was paid for the imported raw material used in the production of the exported goods/products to the exporter.

Sustained export growth is essential to maintain and accelerate GDP growth, increasing employment and reducing poverty. To encourage exports, government offers duty drawbacks to the exporters, which will make their products more competitive in the overseas markets.

These drawbacks fall under two categories:

  1. Drawback on re-export of the duty-paid goods

    For goods that have been imported in the country, on payment of duty, and then are being exported within a specified time period, the customs duty paid for the product import can be claimed as the Duty Drawback with certain cuts.

  2. Drawback on the imported material used in manufacturing the exported goods 

    Duty drawback scheme provides a rebate of the duty that is chargeable on the imported or excisable goods used in manufacturing of the exported product.

Change in the Policy rates

The following table shows the changes in the All Industry Rates (AIR) of Duty Drawback:

Reduction in duty drawback rates, although not entirely unforeseen, will affect the price competitiveness of Indian textile and apparel exports.

The reduction will cause a setback to garment exports since the exporters typically factor in drawback in pricing and would have to take a hit without a corresponding reduction in their input cost (fabrics).A transition period mechanism for adjustment to the new regime would have helped says Navdeep Singh Sodhi

Effect on Garment exports
  • Global competition

    India garment exporters are already facing severe competition in the global market from countries like Bangladesh, Sri Lanka, Cambodia, and Vietnam. This rate cut is going to further elevate the costs of Indian garments, which will push Indian exports further back.

  • Job Losses

    Since 80% of the garment units in country belong to MSME category, this rate cut is expected to lead to huge job losses. In a recent press release, the Apparel Export Promotion Council (AEPC) said,

    The duty drawback was one of the key policy support measures towards lifting industry’s cost competitiveness. However, due to the steep drop in the drawback support over 7000 small and medium enterprises in the apparel export sector will be crippled, creating an adverse impact on the employment being provided to over 12 million people by this sector

  • Working Capital Issue

    GST shift required the industry to put in a huge working capital, where GST refunds are still not received, generating an overall liquidity crunch in the industry. To add to the uncertainties, appreciation of rupee against dollar is further causing around 7%-8% month-on-month drop in ready-made garment exports.

  • Standing Commitments

    Lastly, industry works on commitments and projects. Duty drawback becomes a factor in the financial aspect of the order at the very first stages of building of project charter itself. Order commitments in the industry have already been made based on the old rates. This sudden change, hence, is going to impact current deals.

  • GST uncertainties

    Another big reason for the exporters feeling unrest over the decision is the fact that, this rate cut has come at a time when the industry is already facing continuous decline in exports due to global slump, and uncertainties post the GST regime. Exporters are still struggling to recuperate from the huge shift that GST has demanded. Now, with this rate cut, there is a sense of shock amongst textile and garment exporters.  AEPC has demanded the Ministry Of Textiles to extend the transition rates till March 31, 2018, to instill confidence in the industry as it is already suffering from the GST induced volatility.

    There are three key challenges that the textile industry faces today, apart from day to day hassles of coping with the generic issue of book keeping under the new regime

    1. Disparity in GST rates
    2. Reduction in duty drawback rates
    3. Liquidity for input tax paid on exports

    GST rate across the textile value chain is 5% with the exception of man-made fiber and yarn which attracts 12%.The inverted rate on MMF value chain whereby the input (Yarn) attracts a higher rate (12%) than the output (Fabric) on which the applicable rate is lower (5%) leads to accumulation of input tax credit which the firm is unable to offset. This would then add to the cost and affect liquidity says Navdeep Singh Sodhi

Input Tax Credit (GST) to Balance Losses

What exporters are looking ahead to now is to gain benefit or at least reduce their losses through the complete tax package, i.e. balancing their losses from the rate cut in duty drawback with the GST’s Input Credit.

This step comes from the government, as under GST system, duty drawback is expected to lose its significance. Input tax credit provided as a refund under GST, is expected to provide the required boost to the export sector of the industry rather than reliance on duty drawback.

Currently, a significant portion of the textile industry in India is operating under the unorganized sector or a composition scheme. Reduction in duty drawbacks, along with input credit to registered taxpayers, will enable the government to pull out these businesses towards an organized sector.

Also, importing the latest technology for manufacturing in textile sector is very expensive due to the excise duty paid. Government, through its GST scheme, has allowed an input tax credit for the tax paid on the capital goods, to further aid in technological advancement of the Indian textile industry. AEPC has also requested the government to allow input tax credit on the GST paid on job work and stock transfer where drawback isn’t available.

Conclusion

Overall, the current global economic conditions, along with the local uncertainties are causing a huge turmoil in the India’s textile export industry; hence, cut in the duty drawback rates, when the exporters are still awaiting their input credits is creating unrest. In the long term, when the GST system is streamlined, these steps together might act as positive package for Indian textile exports.

Exports are zero-rated, implying that an exporter will have to apply for a refund on GST paid on inputs however during the lock in period of say 90 days to collect the refund, his funds would be blocked. The government is expected to address this through an e-wallet scheme to be implemented after March 2019.

It is only hoped that a pragmatic view will be taken of the difficulties facing the nation’s textile industry. Afterall, 10 crore lives depend on it for survival says Navdeep

Guest Author:

Navdeep Sodhi has  3 decades of international experience in the textile industry. His expertise includes strategy, international trade and investment and products and technology. He consults for international development institutions and the corporate textile industry organizations worldwide. He is well acquainted with the development of the textile & apparel industry in emerging countries such as Bangladesh. Mr. Sodhi is a partner with Gherzi Textil Organisation, Switzerland.

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