GST: Opportunity for the textile and apparel sector

The deferral of the Goods and Services Tax (GST) Council’s decision to fix the tax rate for textiles and apparel at the June 3, 2017, meeting did not come as a surprise to the industry. The decision requires further deliberations; it would have an impact not only on consumers but also on the millions of workers employed.

The textile and apparel sector plays a critical role in the Indian economy. Its share to GDP and exports are 6 per cent and 13 per cent, respectively. The sector is the second largest employer, with direct employment of over 50 million and indirect employment of over 60 million people. The apparel sector is 80-fold more labour intensive than the automotive industry and 240-fold more intensive than the steel sector. The sector is also a vehicle of social transformation, especially for women. 

Globally, India has an opportunity to ride the growth wave through the textile and apparel sector, with China losing the market share due to rising wage levels. However, the space vacated by China is being taken over by countries like Bangladesh, Cambodia and Vietnam. Here, India has a comparative advantage in terms of abundant labour at competitive prices, as well as a large domestic market base. 

Among the key challenges faced by the sector, the tax and tariff policy in particular has created distortions, impeding India’s domestic as well as export competitiveness. The sector is characterised by small and inefficient manufacturing, arising out of the exemption from the central excise for those with Rs 1.5 crore of turnover.  The current tax regime also differentiates by type of fibre, price, product and branding. As a result, the supply chain is fragmented and individual production units do not have the scale required for domestic or export markets. 

The ad-hoc and fragmented application of tax leads to blocked input taxes, high compliance costs and product categorisation disputes. It also creates opportunities for tax avoidance and gives rise to competitive distortions.

Historically, states had transferred their powers of taxation of the textile industry to the Centre through the additional excise duty (AED). After the introduction of VAT, the AED was withdrawn in 2007 and states were empowered to levy VAT on textiles. However, they have encountered significant resistance from dealers and hence the textile supply chain remains largely untaxed. The aggregate revenue from this sector is Rs 3,400 crore, against a total consumption of Rs 4.5 lakh crore. 

The GST provides a once in a lifetime opportunity to correct the distortions in taxation by bringing the sector into the tax base.  

There is virtual consensus in the industry for seamless application of the GST throughout the supply chain at a moderate uniform tax rate, without any exemption in the supply chain. Extension of the GST to both fabrics and apparel will lead to a very substantial expansion of the tax base. With a modest compliance in the sector, a 5 per cent GST would generate revenues of around Rs 11,000 crore, a three-fold increase over current revenues. 

Indications are that the GST Council is generally supportive of this structure. However, some sections wish to continue the preferential tax regime for cotton fabrics and for unbranded garments. Historical experience shows that selective application of tax to this sector at higher rates would encounter significant political resistance, perceived as inflationary, lead to leakages, and be detrimental to job creation and overall growth. 

The GST provides a historic opportunity for simplifying the tax structure and promote fibre neutrality, innovation, technology development and productive efficiency. It can play a central role in accelerating growth, enabling India to become a significant player in the international markets. 

The industry awaits with bated breath its tryst with destiny on  June 3, when the GST Council decides upon the rates for the sector, and prays that it does not face another twist of destiny that will relegate it to the margins forever. 

Rakesh Biyani is joint managing director, Future Retail, while Rahul Mehta is president, CMAI