The Government wanted to correct a tax anomaly, but in the process the apparel, textiles and footwear sectors believe the move would lead to a significant hike in their cost of production.
For years, the manmade fibre (MMF) manufacturers in the country made representation to the government to fix an anomaly in GST which had a severe impact on their business. The Finance Ministry finally on November 18 notified a 7% hike in GST (from current 5% to 12%) applicable on manmade fibre (MMF) MMF yarn, MMF fabrics, a move that would address a sore point for the sector. However, the government went a step further and said even finished products such as apparel, textiles and footwear will be taxed at 12% from earlier 5%, effective January 2022. This has now caused considerable pain for the entire sector.
The Central Board of Indirect Taxes and Customs (CBIC) stated that the GST rate on any worth of clothes will be 12% beginning next year. Currently, a 5% tax on sales up to Rs 1000 per piece is charged. Further, the GST rates on some synthetic fibres and yarn have been reduced from 18 to 12%, putting rates in line with the rest of the textiles sector.
The stated goal behind the Finance Ministry's move was to address anomalies caused by an inverted duty structure, which occurs when the tax rate on inputs is greater than the tax on the finished product. However, the hike in GST on finished products such as apparel, textiles and footwear hasn't gone down well with the industry, particularly the MSME sector that dominates these segments.
For manufacturers, the government's decision appears to be a mixed bag. While the GST hike is hailed by manmade fibre (MMF) manufacturers, representatives of other segments have expressed their dismay over the move. The MSME sector, which had already been hit hard by decreased business, countrywide pandemic induced closures, believes that the decision is expected to significantly increase their cost of production.
The government's rationale is that the decision would correct the Inverted Tax Structure (ITC) anomaly plaguing the MMF textiles value chain. The textiles & apparel industry had a long-pending demand for the removal of
on the manmade fibre (MMF) value chain, said the Ministry. The GST on MMF, MMF Yarn and MMF Fabrics were 18%, 12% and 5% respectively. Taxation of inputs at higher rates than finished products created build-up credits and cascading costs and blockage of crucial working capital for the industry, the government said.
MMF Sector- the only beneficiary?
MMF garments cannot be identified easily and cannot be taxed differently, hence there is a need for a uniform rate, say experts. A Sakthivel, Chairman, Apparel Export Promotion Council (AEPC) asserted that since there is high potential of value addition in the garment segment, the rate increase will be largely absorbed in value addition. "The 12% uniform GST rate will help the entire value chain of MMF textiles sector as it will save a lot of working capital and reduce the compliance burden of the industry besides helping in resolving the input tax credit residues accumulated because of inverted tax structure," Sakthivel said.
Notably, the domestic MMF industry mainly comprises two components i.e., polyester and viscose. These together account for about 94% (in volume terms). India remains the 2nd largest producer of both polyester and viscose globally, says Invest India portal, the government's trade promotion agency.
Barring the MMF segment, the common view held in the industry circle is that the Covid-battered MSME sector is now faced with an added tax burden.
Added troubles
Several MSMEs that ET Online spoke to maintained that the GST hike would severely affect their working capital.
Rajiv Wasan, General Secretary of Agra Footwear Manufacturers and Exporters Chamber (AFMEC), said the GST hike is not in the interest of the MSMEs operating in the leather sector-a segment that has already been hugely dented by the pandemic's fallouts. Similarly, textile manufacturers dependent on the cotton value chain also disapprove of the GST hike on cotton-based products.
India's textile industry is majorly cotton-based. The country is the largest producer of cotton in the world, accounting for about 22% of the world cotton production, according to the Cotton Corporation of India (
). Exporters, for obvious reasons, say the government should not have touched the cotton value chain as it's the key raw material used in a host of allied segments. The home furnishing textile is one segment that extensively uses cotton. "From 1st January 2022, the cotton textile industry will have to pay enhanced GST @ of 12% on their products whereas earlier, we were paying GST @ 5%. As the cotton textile sector is already burdened because of 70% rise in price of raw materials and a nearly 500% rise in sea freight, we have no option but to extend the net burden of enhanced 7% GST to the end-consumer," said Srivastava, Director, Home Textile Exporters' Welfare Association (HEWA).
Srivastava also urges FinMin to "rethink and review" the GST hike decision. However, tax experts are of the view that there weren't simple choices before the government and the decision was taken after several rounds of deliberations. Ayush Mehrotra, Partner at Khaitan & Co, highlights that during various GST Council meetings, the anomaly in rates of finished products vis-à-vis the inputs for these industries was repeatedly adding to the government's refund bill and litigations. So, a decision to address this was bound to come. "However, in hindsight, this change is also likely to increase the financial pressure for MSME's and the middle-class population, which will have to bear the burden of this additional tax," Mehrotra adds.
The government claims that the amendment to change the GST rate from 5% and 18% to 12% is to overcome the refund of the Inverted Duty Structure. However, Bimal Jain, Chair of the Indirect tax committee at PHDCCI, said it is "not the solution" since by increasing the GST rate on most of the textile products from 5% to 12%, the government has created more hurdles for the textile industry as this sector is majorly unorganised.
"Instead, the government should have brought down the rates of raw material to 5% and ensure the sustainability of sectors as it creates employment opportunities, fighting with pricing and costing, etc, '' said Jain. In his view, if the government intended to remove the inverted duty structure, then reversal of ITC should not have been made compulsory for the textile industry in July 2018. In this regard, the textile industry may place its representation before the GST Council to either re-allow the reversal of ITC made by the industry in July 2018 or any alternative solution to mitigate the said reversal loss," he said.
With the GST hike on textile and footwear goods, there are also fears that the MSMEs will endure the increase in pricing because of the elimination of the cost differential that existed. Rajat Mohan, senior partner at AMRG & Associates, said that differential tax rate based on price was critical for small players since it enabled them to maintain low costs clothing, and these units may suffer from a decline in demand. In the long term, many unorganized sector companies may move out of the GST regime," Mohan said, adding taxing clothing, which is a basic need, at 12% is "completely unjustifiable".
"To alleviate the problem encountered by only 15% of the sector, a high increase in the GST rate will have a severe impact on 85% of the industry. A far more effective and rational approach would be to subject the entire value chain to a flat 5% GST rate. This would not only correct the inverted duty structure anomaly, but would also provide the industry with a boost," he said.