Finance Minister Nirmala Sitharaman on Tuesday said the recent government notification on uniform goods and services tax (GST) at 12 per cent for the textile and apparel sector was aimed at correcting the inverted duty structure that was leading to accumulation of input tax credit by companies. She did not subscribe to the industry’s fears that this would lead to higher prices of finished products.
“Every time adjustments in rates do not lead to price increase for customers. Higher rate on inputs was leading to higher refunds to taxpayers and needed correction. Correction of the inverted duty structure was decided at the GST Council,” she said at a media briefing during her two-day visit to Jammu & Kashmir.
The notification, issued by the Central Board of Indirect Taxes and Customs, has not gone down well with many in the industry.
Sanjay Kumar Jain of Delhi-based TT, which has its main manufacturing unit at Tiruppur in Tamil Nadu, said the move will be advantageous only for 15 per cent of the industry. The remaining 85 per cent, mainly from the micro, small and medium enterprises (MSMEs) segment, will be severely impacted.
“It is a bad deal for the industry on multiple counts. Consumers will have to pay 6-7 per cent more from January 1 since the prices of garments below ~1,000 currently attract 5 per cent GST. Since MSMEs make 85 per cent of such garments, it will hit the demand and revenue of a sector already feeling the Covid-19 pinch,” Jain added.
The garment sector has already seen a rise of around 20 per cent in prices due to spike in cotton and yarn rates in the past year.
Associations are of the opinion that the inverted duty structure will continue, given that some inputs like purified terephthalic acid, monoethylene glycol in the dyeing segment are under the higher bracket of 18 per cent GST.
“It is a concern for domestic players. They have to raise charges for the end-customers from 5 per cent to 12 per cent. For exporters, this is a good step. It will relieve any accumulation that might happen due to input tax credit,” said Raja Shanmugam, president, Tiruppur Exporters’ Association.
The industry has said the move will affect demand, leading to a rise in working capital requirements and squeeze production.
The textile ministry, on the other hand, said the move will help the man-made fibre (MMF) segment grow and emerge a big job provider in the country.
It said the textile and apparel industry was having a long-pending demand — first under sales tax, then under value-added tax, and finally under the GST regime — for removal of the inverted tax structure in the MMF value chain.
“The GST on MMF, MMF yarn, and MMF fabrics were 18 per cent, 12 per cent, and 5 per cent, respectively. The taxation of inputs at higher rates than finished products created credit build-up and cost escalation. It further led to accumulation of taxes at various stages of the MMF value chain and blockage of crucial working capital for the industry,” the textile ministry said in a statement.
Experts said although the GST Council’s move will address the inverted duty structure, it will make items costlier for customers.
For instance, Rajat Bose, partner, Shardul Amarchand Mangaldas & Co, said, “Undoubtedly, this will help in increasing cash flow and reduce the compliance burden for the assesse. It may increase the cost of finished goods.”
In fact, the Retailers Association of India’s Chief Executive Officer Kumar Rajagopalan said the move is not in anybody’s interest.
“On the business side, it will compound the financial burden of an already-stressed sector, slow its pace of recovery, and affect working capital requirements, especially in the case of MSMEs that account for 90 per cent of the industry. On the consumer side, it will lead to a rise in the prices of garments, hurting consumption. On the government side, it may lead to many unorganised businesses going out of the GST net,” said Rajagopalan.
Ritesh Kanodia, partner, Dhruva Advisors, said, “It is feared that such steep increase in GST rates might drive MSME players out of the GST net, thereby encouraging tax evasion.”
Parag Mehta, partner, N. A. Shah Associates, said the easier mechanism would have been to refund the accumulated input tax credit to the manufacturer or dealer. “This would have led to the overall ease in working capital and reduce the price of textile goods,” said Mehta.
With inputs from Nikunj Ohri in New Delhi & Sharleen D’Souza in Mumbai