The textile industry is awaiting the central government’s decision on whether the new Goods & Service Tax (GST) rate would be five per cent for segments presently not subject to any indirect tax or stick to one of 12 per cent.
The sector provides direct employment to an estimated 45 million individuals and indirect jobs to another 60 million. And, is a tenth of the country’s manufacturing. Textile commodities have a seven point weight in the Consumer Price Index.
Observers say there is a large ‘grey market’ which is completely outside the ambit of tax payment.
Currently, fabrics are fully exempt from taxes but not yarn or garments. The way GST works, with input credit, the duty will apply to all on value addition and can be collected back from buyers. However, a segment that has been completely out of a tax regime will find it difficult to accept a 12 per cent rate.
Rahul Mehta, chairman, Clothing Manufacturers Association of India (CMAI), said: “A low GST rate of five per cent, applied uniformly across the sector, will propel domestic production and facilitate and encourage voluntary (tax) compliance. This growth would enable India to achieve its target of generating 35 million jobs, and attracting investment worth $200 billion by 2025.”
Adding: “A multiple tax structure will also compromise fibre neutrality, with producers moving to manufacture of garments made from lower taxed fabric. Such a structure might also lead to disputes in classification of textile products to different tax categories.”
CMAI says extension of GST to both fabrics and apparel would mean a substantial expansion of the tax base. Assuming even 50 per cent compliance in the sector, a five per cent GST would generate annual revenue of Rs 10,850 crore for the government.
The current system, say observers, is marked by exemptions, concessions and tax cascade. Fabrics are exempt under both the central excise and state value added tax (VAT). The effective rate on garments is also low (1.2 per cent excise and five per cent under state VAT). The total of output tax from the sector is estimated to be about Rs 3,400 crore a year.
#CA Amit Shah & Co.