Footwear, readymade garments likely to attract higher rates of GST

The fitment committee, which recommends rate changes to the Council, has proposed increasing the rate on footwear (less than Rs 1,000), readymade garments, and fabrics to 12% from 5% now

Footwear and readymade garments may have higher rates of goods and services tax (GST) with the GST Council expected to take up correcting the inverted duty structure in its meeting on Friday.

The fitment committee, which recommends rate changes to the Council, has proposed increasing the rate on footwear (less than Rs 1,000), readymade garments, and fabrics to 12 per cent from 5 per cent now.

For inputs like manmade fibre and yarn, the panel has proposed reducing the rate to 12 per cent from 18 per cent to correct the distortion.

The fitment panel comprises officers from the Centre and some states.

An inverted duty structure arises when the GST rate on raw material is higher than that on finished products, resulting in a higher input tax credit (ITC) outflow.

A registered taxpayer can claim refunds of ITC on account of higher tax on input and lower tax on output.

“The inverted tax structure under GST needs to be corrected as it is causing cash flow issues for manufacturers. Moreover, in some cases the accumulated ITC is not even refundable, like for capital goods and input services, even if the rate structure is inverted. The government also suffers because it results in a huge refund outgo,” said a government official.

An inverted rate structure makes import more competitive, putting domestic units at a disadvantage, he added.

While footwear of up to Rs 1,000 falls in the 5 per cent GST bracket, inputs like the shoe sole, adhesives, and colours are taxed at 18 per cent, resulting in an inverted duty structure. Other inputs like non-woven fabric and leather are taxed at 12 per cent.

This creates a case of unutilised ITC and hence causes refunds. 

In the case of footwear, the government refunds about Rs 2,000 crore a year. About 70 per cent of the footwear is estimated to be charged a concessional rate of 5 per cent.

The GST Council had in 2018 extended the 5 per cent rate to footwear priced up to Rs 1,000 from those priced at Rs 500. Besides, in 2019, it was decided that the GST rate would apply to the supply value instead of the retail sale price.

The decision on correcting the inverted duty structure was deferred in June last year due to the pandemic. The Council had in March last year corrected the inverted duty structure on mobile phones and specified parts by hiking the tax rate to 18 per cent from 12 per cent.

In the case of readymade garments, the pre-GST incidence was about 13.2 per cent compared with the current levy of 5 per cent. Fabric has a GST rate of 5 per cent, whereas different types of manmade fibres and yarns are taxed at 18 per cent. Initially the government had not allowed fabric manufacturers to claim ITC refunds, but later relented and allowed it in the July 2018 meeting.

“ITC refunds should not have been allowed on fabric in the first place. It was a political call taken at that time. It should be addressed now,” said another official.

The fitment panel has listed some other items like renewable energy devices, railway parts, pharmaceuticals, tractors, LEDs, agarbatti, ink, pen, utensils, water, and pumps that need a correction in inverted duties. These may be taken up in following meetings.