GST Council to discuss rollback of inverted duty structure in textiles

Finance Minister Nirmala Sitharaman will chair the 46th meeting of the Goods and Service Tax (GST) Council in New Delhi on Friday. The agenda of the meeting will be to discuss the recently announced hikes in GST rates for textiles, which comes into effect from January 1.

The Council could also deliberate on the reports of the two Groups of Ministers (GoMs) which were set up in the last Council meeting in September.

On the sidelines of a separate pre-Budget meeting between Sitharaman, her top officials, and representatives of states and Union Territories, Tamil Nadu Finance Minister P Thiagarajan and Rajasthan Technical Education Minister Subhash Garg confirmed that the main agenda of the meeting will be to discuss the rate hike in textiles to correct inverted duty structure.

“Rajasthan does believe the rate hike on textiles should be rolled back especially when countries like Bangladesh are giving us stiff competition in the sector,” Garg told reporters on Thursday.

“The states received the agenda just yesterday (Wednesday). So a very short notice, and textile seems to be the main point of discussion,” Thiagarajan said

At the 45th meeting in Lucknow on September 17, the GST Council had decided to rectify the inverted duty structure for footwear and textiles. Subsequently, the rate for footwear and textiles for any value was raised to 12 per cent, effective from January 1, 2022. Earlier the GST rate was 5 per cent for sale value up to Rs 1,000 per piece in the case of apparel and per pair in the case of footwear.

While experts hailed the move, a section of the clothing industry decried it, saying only a small group of the sector had inverted duty structure. Many trader organisations have also been demanding a rollback of the rate hikes.

Former West Bengal Finance Minister Amit Mitra and Telangana Industries Minister K T Rama Rao had earlier urged the Centre to roll back the proposed GST rate hikes in textiles. “Modi govt will commit another blunder on Jan 1st. By raising GST on textiles (from) 5 per cent to 12 per cent, 15 million jobs will be lost and 1 lakh units will close,” Mitra had tweeted.

The problem of inverted duty structure arises when the finished product is at a lower tax bracket compared to the input raw materials. However, this usually leads to a rise in the rate of the finished product. There has not been as much opposition to the rate hike in footwear, compared to textiles.

At the Lucknow meeting, the Council had set up two GoMs. One group was tasked with suggestions on rationalising rates and correction of inverted duty structure, and is led by Karnataka Chief Minister Basavaraj Bommai.

The other group has been tasked with recommending ways to review IT systems, potential sources of evasion, and data analyses in order to expand the tax base and and maximise returns. This GoM is headed by Maharashtra Deputy Chief Minister Ajit Pawar.

Both these reports could be taken up in the in-person meeting on Friday.