Textile industries play a very important role in the development of the Indian economy with respect to GDP, Export promotion, employment, etc. It is the one of the oldest manufacturing industry in India. It is the second largest industry after agriculture which provides skilled and unskilled employment. In this sector, 100% FDI is allowed by the Government under the Automatic Route. Textile Industry contributes more than 10% in Total Export. Textile Industry is divided into two Segments, firstly Unorganized and Secondly Organized. Unorganized sector consists of Handloom, handicraft, small and medium-scale mills and Organized Sector consist of spinning, apparel and garments segment which apply modern machinery and techniques. Textile industry has been enjoying various tax exemptions, concessions under indirect taxes.
Implementation of GST in the place of the present indirect taxes would have considerable impact on textile industry. In this article, an effort has been made to shed some light on GST impact.
Present Indirect Taxes applicable for the Industry
1. Central Excise Duty
Central Excise Duty was first levied on woven garments in 2001. Subsequently the whole textile Industry was brought under the Excise Duty net by 2003. An option for availment of exemption from payment of Excise Duty was introduced vide Notification no.30/2004 with a condition that any manufacturer availing the option is not eligible for CENVAT credit on inputs and input services. There was also an option to pay concessional rate of excise duty with Cenvat credit benefit. Most of the manufacturers in the Textile Industry opted for exemption.
In 2011, mandatory excise duty was reintroduced on branded garments with Cenvat credit benefit and abatement of 55% for duty payment. This mandatory levy was again removed in 2013 and optional scheme of paying duty with Cenvat credit benefit was continued. In 2016, mandatory excise duty has been introduced again on branded readymade garments made up of textiles falling under central excise tariff heading 61, 62 and 63. However the duty is payable only when retail sale rice (RSP) is Rs.1000/- or more and levy is only on 60% value after standard abatement of 40%.For payment of duty, rate of 2% without Cenvat credit or 12.5% with Cenvat credit option is applicable. Non-branded goods continued with “Nil” levy without Cenvat credit benefit. Otherwise, option of paying 6% with Cenvat credit in case of garments / articles of cotton, not containing any other textile material is also available. For garments of other composition, “Nil” rate of duty without Cenvat credit or 12.5% with Cenvat credit is available.
2. VAT / Sales tax
Most of the states in India have exempted textiles and fabrics from levy of VAT / sales tax. Wherever no exemption has been provided, for small players, the option of paying taxes at concessional rates is also provided under composition scheme in many states
3. Entry tax
In many states, entry tax is levied on specified goods when such goods enter local area. Even textiles such as cotton, woolen or silk or artificial silks are liable to entry tax in states like Karnataka at the rate of 1% which is adding to purchase cost.
Contract Manufacturing/ Job Work in garment industry
It is the usual practice in the readymade garment industry, that the owners of the brand names out source the manufacturing activity completely or on job work basis. In such cases there are some special provisions for the levy of Excise duty. The liability for the payment of duty which usually rests with the job worker as the manufacturer shifts in such cases to the brand name owner and he is required to register and comply with other formalities relating to levy of duty. Alternatively, Brand name owner can authorize his job-worker to obtain registration and pay the duty on goods.
Some Pertinent Issue in Current Taxation Under Textile Industry
Fabrics vs. garments, e.g. should sarees be treated as fabrics or as ready made garments
Fibre neutrality :
Cotton fibre vs. man made fibres. Cotton fibre treated favorably as compared to Man made fibres Effective tax rates vary by degree of integration :
Power looms vs. Composite mills.
Effective tax rates for composite mills are higher than that of power looms discouraging integration of production adversely affecting efficiency.
Input Tax Credit Breakup:
As discussed above, the textiles industry comprises of both regular and composition taxpayers. Most of the manufacturers in the industry are in Composition Segment. Numerous transactions in the textiles industry flow from the unorganized to the organized sector and vice versa. Where Regular/Registered Taxpayer purchases goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Cenvat Credit chain. Input Tax credit paid on the previous transaction is included in the cost of the product pushing up the price of the final product..
Small Business Compliance Cost:
Composition scheme Taxpayer is hesitant to join Credit chain as it increases the compliance cost of engaging professional to meet their Tax obligation.
Other taxes not included in the credit chain.
Supply chain of Textile Industry is loaded with input and output across state boundaries to reach the ultimate consumer. Octroi and Entry Tax are the bottlenecks, credits of which are not allowable, thus form the part of the cost of the product. This not only pushes the price of the product up but also brings in cascading effect of taxes.
There are many gaps within the current arrangement. The State VAT applies to primary producers, manufacturers and distributors and retailers. However, it excludes the service sector. The CENVAT and the service tax are levied on manufacturers and service providers respectively but the primary producers, distributors, are excluded from their scope. In the current tax structure, the excluded sectors cannot take credit of the tax charged to them on inputs by their suppliers. The input tax on these services gets added to the cost of the product supplied by them, leading to tax cascading
GST IMPACT on readymade Garments industry
The textile industry is characterized by large inter-state movements both in respect of inputs and finished products. It also draws inputs from many other sectors consisting of both goods and services including dyes and chemicals, petroleum products and transport services. There is a large inter-face between organized and unorganized sectors. Given the inter-state and inter-industry movement of goods and services and interdependence of organized and unorganized sectors in the textile industry, the GST will have significant effects on the growth and productivity of the textile sector.
Taxation of textile sector is opaque and non-neutral across its various segments. Many textile outputs are either exempt under the central and state tax regimes or are subjected to relatively low tax rates. Most of the indirect taxes fall on inputs, both goods and services, and therefore remain hidden. On the whole, the textile sector is lightly taxed and extensively subsidized. Textile exports are supported through payments of un-rebated taxes (duty drawback) on textile inputs and other subsidies.
Taxation of the textile sector will be significantly recast with the implementation of the Goods and Services tax (GST). The GST is expected to replace a number of existing central and state taxes. India has a number of schemes for rebating or subsidizing textile exporters
The main implications of GST compared to the present domestic indirect tax regime in the context of Textiles can be divided into two parts: (a) main and immediate effect, which may be adverse in nature and (b) other longer term positive effects.
Main Effect: Rate-Revenue Effect
After the application of GST, there will be an increase in the effective tax rate to have a negative impact on the textile sector as compared to current taxation mainly because of current incidence of low tax rate; especially, on cotton value chain; exports however, will not be impacted as it will be zero-rated.
Other Positive Effects
Some of the longer term positive effects would be as follows.
· GST is likely to have a fibre-neutral rate structure unless differentiation is introduced by explicit choice (Fibre Neutrality Effect); –
· Textile outputs will be taxed if domestically consumed and input taxes paid will be rebated making the tax-regime transparent (Transparency Effect
· Exports will be zero-rated and all input taxes paid will be rebated by the tax authorities making duty drawback kind of schemes redundant (Export Zero rating Effect);
· Fiscal barriers to inter-state movement of textile inputs and outputs like the CST and the entry tax will be eliminated (Common Market Effect
· For the industry, compliance costs will be lower (Compliance Promoting Effect)
Capital goods scenario
In the current scenario as most of the manufacturers in the textile or readymade garment industry either opt for exemption of tax or for composition scheme without availing the input tax credit, the tax paid on the purchase of capital goods adds on to the purchase cost of the capital goods and recovered over the life of the machinery as depreciation.
In the GST scenario, the taxes paid on purchase and installation of capital asset and equipment can be claimed as Input credit. This will lead to up-gradation and expansion of the Textile Industries with latest Improve technologies.