Central Goods and Services Tax (CGST) officials in the recent months have investigated over two dozen textile manufacturing companies across the country for mis-classifying textile processing activities and subsequently paying lesser tax.

According to official sources, the CGST department has observed that several textile manufactures are recording activities which involve ‘changing the nature of cloth’ as ‘washing and dyeing’, and therefore are paying lower tax rate of those incomes.

Under the GST laws, washing and dyeing are considered as ‘job work services’ in the textile industry and attract a GST rate of 5%; while processes that significantly transform the fabric, such as bleaching, printing, or other treatments that alter its essential characteristics, attract a GST rate of 18%.

“Textile manufacturers are knowingly misclassifying the services…and paying 5% tax, where they should pay 18%. CGST officials are investigating units of all kinds of firms (corporates, small & medium companies) across India,” said an official. Authorities feel the shortfall in tax-payment is to the tune of hundreds of crores, causing a substantial loss of revenue to the government.

Initially, tax authorities argued that these processes, which substantially alter fabrics’ essential characteristics, should be taxed at 18%, instead of the current 5% to safeguard government revenues. Building on this, during the 45th GST Council meeting, a proposal to increase the rate of dyeing and printing services to 12% was deliberated. However, it was ultimately dismissed.

Source: The Financial Express