Modvat Credit For Composite Textile Mills Cleared

The finance ministry has also changed the excise duty rates for cotton fabrics and raised modvat credit for all fabrics except cotton from 50 per cent to 70 per cent.

Presenting the budget in July, Chidambaram had said extension of the modvat credit scheme to textile fabrics would bring textiles into the mainstream of a tax system which, he said, tends to reduce, if not eliminate, the cascading effect of input taxes.

"This would also enable composite mills and processing houses to modernise and to produce quality fabrics, which would have a positive impact on exports of textiles and garments," the Union finance minister said in a brief written statement to the Lok Sabha yesterday.

 

The Union budget had announced a two-pronged initiative in the textile sector -- reduction of customs duty on inputs and raw material and extension of modvat to fabrics on the excise side.

In view of the representations from trade, the finance ministry had decided to delay implementation of the scheme to September. The changes announced yesterday will come into effect on September 4.

The cut-off for cotton fabrics has been raised from Rs 25 to Rs 30 per square metre. Cotton fabrics up to a value of Rs 30 per sq m will be charged a basic excise duty of 5 per cent and additional excise duty in lieu of sales tax at the rate of 5 per cent.

Fabrics exceeding a value of Rs 30 per sq m will be charged a basic excise duty of 12 per cent and additional excise at the rate of 8 per cent. All other fabrics will attract a basic excise duty of 12 per cent and additional excise in lieu of sales tax of 8 per cent.

Modvat credit in respect of cotton fabrics has been retained at 50 per cent. For all other fabrics it has been increased to 70 per cent. The notional credit will include credit on account of dyes, chemicals, packaging material and consumables, apart from yarn.

Modvat for fabrics is expected to be a major boost for the sector while meeting the government's objective of promoting synthetics and polyester/nylon fabrics and encouraging value-addition. It is also expected to check evasion of duty.

The textile ministry has sought extension of modvat to fabrics, made-ups and clothing. However, "this is not likely to go through," a government source said.

Import duties on filament yarns -- nylon, polyester, viscose -- and their inputs were slashed in the budget. Duty rates for DMT, PTA and MEG have been cut by 10 per cent.

The rates for artificial and synthetic fibre have also been reduced. The rates had been kept high by the previous government at the insistence of domestic pressure groups.

The basic excise duty was 5 per cent on cotton fabrics and 10 per cent on other fabrics to be collected at the processed fabric stage.

Senior government officials had said the textile sector, which has been demanding extension of modvat to the fabric stage, would welcome the budget.