26.11.2021- GST hike on textiles: The issue, industry pain and government’s rationale

At a time when sections of the textile industry were demanding correction of inverted duty structure to ease cash flow, the recent notification issued by the Central Board of Indirect Taxes and Customs (CBIC) has not augured well with the industry.

What is the issue
The GST on Man-Made Fiber (MMF), MMF yarn, and MMF fabrics were taxed at 18 percent, 12 percent, and 5 percent under GST respectively. The taxation of inputs at higher rates than finished products created credit build-up and cost escalation. It further led to the accumulation of taxes at various stages of the MMF value chain and the blockage of crucial working capital for the industry.
GST Council in its last meeting took a decision to correct the inverted tax structure and come up with a notification No. 14/2021 dated 18.11.201 raising tax from 5 percent to 12 percent for several textile and apparel items from January 2022.
Industry claims
Considering the change in the rate, the industry has been clamouring for a reversal as they feel, it will make their products costlier, which will impact the sale. Terming it as unjustified and does not meet the basic object of removing inverted duty as envisaged by the government, the Confederation of All India Traders (CAIT) said, “Instead of simplifying and rationalising the GST tax structure, the GST Council has made it as most complicated GST law in India over the world.”
CAIT secretary general Praveen Khandelwal said, “The question is whether the inverted tax structure is totally corrected? The answer is a big no. In the cotton textile industry there was no inverted tax structure, then why fabric and other cotton textile goods were brought under the 12 percent bracket. Even in the man-made textile industry, at the stage of manufacturing garments, sarees and all types of made-ups there was no inverted tax issue. Without having any understanding of the stages of the textile industry such a harsh decision will be a regressive step.”
“The central government's notification to increase the rate of GST on basic items like textiles and footwear from 5 percent to 12 percent is being opposed all over the country including Delhi and the CAIT has decided to launch a mega agitation across the country against such arbitrariness. The agitation will be led by two important trade associations of cloth trade namely Delhi Hindustani Mercantile Association and Federation of Surat Textile Association (FOSTA) under the umbrella of CAIT. Apart from textiles and footwear, trade organisations of all types of trade, workers, employees associated with them will also participate in it. CAIT has urged finance minister Nirmala Sitharaman and textile minister Piyush Goyal to keep the notification in abeyance and start consultation with traders,” Khandelwal said.
Expressing similar concerns and sharing the impact of the increase in GST on the businesses, Kumar Rajagopalan, CEO, Retailers Association of India (RAI), said, “The increase in GST rates on textiles and apparel is not in anybody’s interest due to its impact. On the business side, it will add to the financial burden of an already-stressed sector, slow down its pace of recovery and affect working capital requirements especially in the case of MSME businesses which account for 90 percent of the industry. On the consumer side, it will lead to a rise in the prices of garments, thereby hurting consumption. On the government side, in the long run, it may lead to many unorganised businesses going out of the GST net.”
RAI believes that a far more beneficial and reasonable solution is to make the Entire Value Chain subject to a flat 5 percent GST rate. This will not only resolve the Inverted Duty Structure anomaly but also give a fillip to the industry.
Government response
Union finance minister Nirmala Sitharaman on during her recent visit to Jammu and Kashmir said the recent government notification on uniform Goods and Services Tax (GST) at 12 percent 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 the price increase for customers. A 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.
“Inverted duty structure was a problem for the MMF sector. The GST rates currently are 18 percent for fibre,12 percent for yarn and 5 percent for fabrics. The recent notification issued as a follow-up to the recommendations of the 45th GST Council meeting prescribing a uniform rate of 12 percent across the MMF chain has reportedly left some sections of the sector ‘distressed and disappointed’.
The MSME sector which is largely focused on fabric production would undoubtedly get impacted. While the rate hike for them at 7 percent is substantial, the new rates will ensure no blockade of credit. While this was not unexpected, the MSME sector’s demand for maintaining a status quo or a uniform 5 percent rate is perhaps not justified. The new rate is effective from January 1, 2022, and gives the sector sufficient time to prepare themselves,” said Najib Shah, former CBIC chairman.

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