Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. GST is levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.
It has been one month since the GST was implemented in India. GST, by design, is aimed to transform the current indirect tax system from an origin-based model to a consumption-based one. GST is expected to replace central excise duty (or CENVAT), service tax, CST etc., as well as state taxes such as VAT and ET. Inter-state transactions, including stock transfers, for which the taxation model is still being debated, may be chargeable as per Integrated Goods & Services Tax (IGST). GST is expected to facilitate the availability of full input tax credit on input taxes paid at the time of purchase (of goods and services), as well as utilize the amount toward output GST liabilities.
The cotton-textile-apparel value chain is second largest employer after agriculture providing livelihood to over 100 million people. India has the second largest textile industry in the world after China. India’s textile & garment industry is valued at USD 105 bn (2015) and growing at 9% CAGR. The industry is projected to double in value till 2025 with domestic demand being the engine of growth. Decline in India’s export performance has been a matter of concern as exports of textiles & apparel dropped to US$37 bn, for a third straight year in 2016. Although,FY 2017-18(Apr-Aug), witnessed a modest 3% growth however its sustainability might be ephemeral says Navdeep Singh Sodhi
Goods and Services Tax might come as a breather and help with the standardization, simplification, and automation of compliance requirements associated with the trading and movement of goods, especially the inter-state movement of goods. GST automates most of the compliance requirements (including forms/permits/way bills, etc.), thereby reducing the cost and effort for the industry.
GST in Textile and Apparel Sector
The textile and apparel sector is a key contributor to Indian economy. Its contribution to the country’s GDP and exports is 6% and 13% respectively. The new GST structure will replace the existing indirect taxes with a fixed tax structure for each product category which will vary from 5% to 28%.
On the retail front, non-premium brands will be benefitted who generate 80-90% of the sales from products worth less than Rs. 1,000. But the premium brands might take a hit. Having said that, the loyalty of the customers to the brands will be a defining factor for both premium and non-premium brands alike. How brands engage their customer’s post-GST will turn out to be one of the most important factors affecting their businesses.
The textile value chain from fiber to fashion is highly complex and widely fragmented. On the one end of the spectrum is the highly sophisticated vertically integrated industrial sector consisting of world class textile mills which drive exports while on the other end are hundreds of thousands of SME’s that make up the unorganized sector consisting of handlooms, power looms independent dye houses and garment factories.
These are concentrated in textile clusters such as Ludhiana and Panipat in the north, Surat, Bhiwandi and Ichalkaranji in the West, Erode and Tirupur in the South and Kolkata in the East accounting for an overwhelming 95% of the country’s fabric production to meet the needs of the common man.Not only the production but also the distribution of textiles is organized through traditional wholesale and retail channels. They have operated in a ‘paperless’ environment much before the advent of modern ERP networks says Navdeep
Input Tax Credit
Earlier, companies could not take credit for some of the taxes they paid, against the final produce. Now consumer companies which spend quite a bit on advertising will be able to offset the tax paid on this under GST.
Secondly, the GST rules for claiming input tax credit has been tightened to avoid frauds or revenue leakage for the government. Among other rules, the buyer cannot get input tax credit unless the supplier has actually paid the relevant tax or claimed input credit. Input tax credit provisions also become important during the transition to GST.
For traders/retailers who may not have proper documentation of the payment of tax on inputs, only 40 per cent credit will be given for stocks in transition. The credit will be higher at 60 per cent if the item falls in the 18 per cent or 28 per cent GST rate bracket, as per the decision was taken by the GST council.
Effect on Customers
• GST is poised to bring long-term benefits for consumers. Now, the customers won’t have to pay taxes-on-taxes which will bring down the price for most of the commodities and enhance product availability.
• According to IMF, GST has the potential to raise India’s medium-term gross domestic product (GDP) growth to over 8% and create a single national market for enhancing the efficiency of the movement of goods and services. Besides improving the ease of doing business, GST will also propel the job hiring by about 11% across the sectors (according to a study by TeamLease).
• GST is one measure that can be a game-changer for the economy as it will not just help in curbing inflation but also the problem of tax-evasion from distributors who currently bear the burden of indirect taxes. The benefits will follow the trickle-down effect and help the under-developed states of India. Change in the business world is inevitable and if the fruits are long-lasting then these changes should be embraced.
• The goods and services tax (GST) regime will push up the prices of readymade garments. All apparel priced over Rs 1,000 will see a 2-3% increase in prices while branded garments below Rs 1,000 may a dip in prices up to 2% or flat price. The GST rate for garments of less than Rs 1,000 is fixed at 5% while all that are exceeding Rs. 1,000, 12%.
• Under the previous tax structure, manufacturers had to pay the excise duty, service tax, the value-added tax and central sales tax (CST). Imports and exports had customs duty, and when the goods were transported from one place to the other it had octroi. Under GST, the supply of goods and services is the only thing that will be taxable. Due to this, the apparel manufacturers are unlikely to increase prices.
Challenges Faced by the Indian Textile and Apparel Sector
The industry veterans say that the tax and tariff policy has created distortions in the Textile and Apparel sector in India which might impede India’s domestic as well as export competitiveness.
The current tax regime also differentiates by type of fiber (cotton vs man-made fibers), by price (for garments above Rs. 1,000), by type of product (fabrics vs garments) and by branding (branded vs unbranded garments). The major problem faced is the variations in the GST rate for garments of less than Rs.1000 is fixed at 5% while all that are exceeding Rs. 1000, 12%.
As a result, the supply chain (consisting of ginning, weaving, processing, and garment manufacturing) is fragmented, and individual production units do not have the scale required for competitiveness in domestic or export markets. The industry had been asking for a uniform tax slab of 5%. A low GST rate of 5% applied uniformly across the sector will propel domestic production, besides facilitating and encouraging voluntary compliance.
It also creates opportunities for tax avoidance and gives rise to competitive distortions, which in turn creates pressures for further exemptions.
Problems for Non-Integrated textile players
Under GST, the man-made fiber yarn is taxed at 18%. On the other hand, the fabric is taxed at 5%.
This difference in tax will create a problem for small textile firms which buy yarn to make fabric. The situation, however, will be much better in the case of integrated textile firms which produce yarn and use it to make fabric.
Also, cotton made yarn and fabric will attract 5% duty. This imbalance is expected to hit small textile companies which buy man-made yarn to weave fabric.
A recent news published in The Indian Express quoted “The Textile traders come out in thousands on the city’s Ring Road, chanting slogans, in support of the bandh called by GST Sangharsh Samiti against five per cent GST on textiles. A huge police force was deployed to avoid any untoward incident.”
Textile traders protest against GST in Surat Monday
GST of 18% on manmade fiber would make the job work segments and their principals uncompetitive against large composite mills. This problem is further accentuated as non-integrated textiles player would not get a refund of excess GST on input.
The implementation of GST will lead to loss of revenue for the manufacturing states. The reason being that the producer states (say Tirupur) will have a lower financial incentive, as GST will only be credited to the State where the supplies are consumed (say Mumbai).
Earlier, the producer states were credited with central sales tax on inter-state sales. This would put pressure on the producer states along with compelling factors like the generation of labor, improvement of infrastructure etc.
The manufacturing sector stands to benefit significantly with the introduction of GST. The overall reduction of cascading effect of taxes, especially on the post-manufacture stage of the supply chain should have a positive effect on the cost of manufactured products in the hands of consumers.
The govt’s decision to charge GST of 5% for apparel priced below Rs. 1000 could boost value retail segment, helping the retailers to expand. For the fabric manufacturers, the exemptions and abatement which was there in Excise and VAT are no more available. Therefore, GST has increased the tax rate but it has now allowed claiming the entire input credit.
The revised tax rate on job work on all textile-related items will come as a significant relief for the textile sector. On the contrary, the apparel segment has been left out of the reduction. This negative step would cause huge hardship to several micro industries in apparel clusters like Tirupur. Since the final product garments is falling under 5% slab, levying 18 % on job work will create an inverted duty scenario disturbing the seamless credit flow thereby defeating the very objective behind GST.
Overall, the GST will help in improving the cost-competitiveness. GST is levied only at point of sale and not at the point of purchase and manufacturing. Hence, the consumer will be bearing only the GST charged by the last dealer in the supply chain, thus simultaneously making it cheaper for the customer and increasing the profitability of the business.
Well, all of these are the assumptions upon the impact of GST. The actual effect of GST will be clear in the near future – whether it fits the Indian economy or not. Also, we will have to see that’s what steps do the states take to welcome GST.
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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