The Goods and Services Tax (GST) was launched in India with effect from 1st July 2017. My previous article How Will New Duty Drawback Rates Affect The Garment Industry? talks about this tax and its then immediate effects in detail. The next jolt came for the industry in the form of duty drawback rate revision, with effect from 1st October 2017. The article talked about the updated rates and its expected effects on the industry.
When these changes were made, the industry had various apprehensions, regarding their success and effects on business. But, now after a year of GST implementation and around 9 months of duty drawback rate revision, we need to look into the actual effects of these on the Indian Apparel and Textile Industry.
Effects That Can Be Seen
The 2017-18 fell flat as far as the growth of the domestic apparel and textile sector is considered. High concentrations of businesses of the unorganized sector were struggling under the effects of GST & duty drawback rate revision. In 2018-19 though, a growth rate of 10-12% is anticipated, as things are stabilizing and businesses are getting used to the new systems.
Exports are a function of multiple variables, and GST and duty drawback revision did bring the apparel and textile exports down. Along with fluctuating dollar value, these jitters have negatively affected the industry exports to a great extent. Although global demand is positive, India’s relative cost disadvantage owing to slow GST refunds and cut in the duty drawback is holding Indian Apparel exports back.
It is clear from the graph above, the decline in export growth became dramatically worse from October. This can be directly related to the decrease in duty drawback rates since October.
The biggest trouble that industry currently is experiencing is the delays in GST refunds. Fund blockage is restricting the manufacturers from paying their suppliers on time. Moreover, a strained hand on working capital is affecting the effectiveness of manufacturers.
Did You Know: Tax refunds worth Rs 4,097 crore, haven’t yet been cleared yet under GST (till July2018)
Has The Industry Adapted To GST
The global apparel industry is highly competitive, especially for India, as it faces a tough competition from almost all its neighboring countries. Reduction of duty drawback rates has taken away the cost advantage India used to enjoy in the global market.
Moreover, increase in MSP (Minimum Support Price) to the farmers, has further led to a growth in the price of the raw material, i.e. cotton and yarn in the country. Currently, India is exporting 25 to 30% of its raw material produce to neighboring competitors, which is concerning, as exporting raw material and importing garments will further push India’s growth backward in the segment.
The domestic industry, however, has seemed to have coped up with the demonetization and GST blues. The market is sluggish, yet the domestic industry is on a growth trajectory. Although growing garment imports from Bangladesh, Vietnam, Sri Lanka, etc. is threatening this growth.
Did You Know: Garment exports from India have fallen by 17% in April-May 2018.
Why Is the Industry Still Pushing For A Raise In Duty Drawback Rates
Effective from January 25, 2018, the government implemented enhancement of duty drawback rates of 102 tariff items. But the textile industry is not content, as only wool items got its place in this list. Wool items form an insignificant part of the textile industry. Thus the industry is demanding an increase in either drawback rates of ROSL (Rebate of State Levies) for yarn, fabric, and garments.
The textile industry does not enjoy huge margins on its products. Thus blocked working capital is troubling manufacturers, especially the MSME segment. The official GST duty on fabric is 5%, but the non-refund of excess input tax credit under the inverted duty structure is adding up to this 5%, making it 8-9% effectively. The imports, on the other hand, are paying only 5% IGST.
The other big issue the textile industry is jittery about is the fact that under the GST regime, the import duty has come down to 10%. Earlier, Basic duty, countervailing, and special additional duty (SAD) together added up to 29%. This reduction in import duty is flooding the Indian market with imports from neighboring competitor nations, posing a threat to the country’s small and medium scale manufacturers.
The main aim of the government with the duty drawback reduction and GST implementation was to bring the small players to the organized sector in the industry. it has been successful in achieving that so far, but the limited margins in the business and working capital blockages have forced many small players out of the business too. Hence, both government and businesses need to reconsider their business models and duty structures to ensure industry’s sustainability.
Dilip Kumar Jha. T E Narasimhan. 1st February 2018. Budget 2018: Boost for textiles exports with Rs 71.48-bn special package.  Retrieved From https://www.business-standard.com/budget/article/budget-2018-boost-for-textiles-exports-with-rs-7-148-cr-special-package-118020100542_1.html
Times Now News. One Year Of GST: India’s Garment Industry Suffering From GST Refund Delays – 02nd July 2018. Tirupur Exporter’s Association.  Retrieved From http://tea-india.org/news-board/8545-one-year-of-gst-india-s-garment-industry-suffering-from-gst-refund-delays-02nd-july-2018
Ashish K. Tiwari. 9th July 2018. Garment exports fall 17% this year, MSP hike may drag them down further.  Retrieved From http://www.dnaindia.com/business/report-garment-exports-fall-17-this-year-msp-hike-may-drag-them-down-further-2634961
Chhavi Tyagi. 30th January 2018. Budget 2018: As imports flood the market, India’s textile industry is getting hammered.  Retrieved From https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2018-as-imports-flood-the-market-indias-textile-industry-is-getting-hammered/articleshow/62705193.cms