Impact of GST on Textile Sector

The Indian Textile Sector is highly export oriented, with as much as 5% of the world’s export coming from the nation, which accounts to over USD 40 billion. As of the latest news, an impetus through tax exemption on all exports is being offered to the industry. And as far as the GST is concerned, the industry is pressing for a zero rating, at least on exports. In fact, it expects the authorities to put in place a refund system with respect to the input tax paid.

In the current system of taxes, more often than not final or finished products are either not taxed at all, or are taxed at a minimal rate, while the various categories of textiles are taxed anywhere in the range of 4 to 12 percent. Given the low rate, the taxes are shifted back to production which in turn leads to blocked input taxes, thus resulting in a spike in the production costs. While the current system of taxation finds its base on the production side, introduction of GST will transform it to being consumption based.

Currently, the production inputs are entitled to this exemption, which depends on the size of their operation. Given this flaw, no initiative of applying any taxes to the industry is agreed upon. Moreover, owing to the differential taxation for various categories, such as fabrics an garments, cotton and manmade fibre, power looms and composite mills, an uncalled for tension has plagued the industry. Then again, the structure of inputs is also broadly divided in the form of textile inputs as well as non-textile goods and services inputs.

All of this will most likely be taken care of with the implementation of GST, since a unified tax rate is proposed with respect to all goods and services.

The textile industry at large, has expressed that a GST rate of about 12% would be in line with the current rate of taxation and hence prove to be rather effective. The Clothing Manufacturers Association of India (CMAI) has even roped in Price Waterhouse Coopers and Wazir Advisors in order to prepare their representation to the GoI in order to push for the inclusion of the ready-made garments under the ‘Merit List’ which will help entail a relatively lower tax rate on these garments. In case this doesn’t happen, it is feared that the brunt of the higher rate on the end of consumers will adversely impact the growth and profitability of the sector. The industry has been advocating the fact that textiles and garments are essential items, and hence deserve a special treatment, as far as the GST is concerned.

While, a large majority of the problems will seemingly be resolved with the implementation of the GST, the final output rate is yet to unfold. It is only after the rate is out in the open, will the industry be able to gauge the actual impact of this tax.