GST council in its 39thmeeting held on 14th March 2020 at New Delhi had a detailed discussion on the matter “Increase in rate of Textiles” etc. to correct the inverted duty structure prevailing in the industry. But it was passed over to future meetings for further consultations and examinations.
In the 45th GST Council Meeting held on 17th September2021 at Lucknow, it was decided to correct the inverted duty structure in the textiles sector by increasing the rates from 5% to 12% for products not exceeding Rs. 1000/- and the same was proposed to be implemented with effect from 01.01.2022.
Further, in the 46th GST Council Meeting held on 31st December 2021 at Lucknow the GST Council recommended deferring the decision to change the rates in the textiles sector as recommended in the 45th GST Council meeting. This decision of deferment was triggered by a letter written to Union Finance Minister Smt. Nirmala Sitharaman by FM of Gujarat requesting reconsideration of Sep 2021 GST Council decision of increase in GST for Textile Sector from 5 to 12% w.e.f. 01.01.2022.
While the implementation of new higher tax rates has been postponed, the Indian textile industry is concerned about the proposed tax hike, claiming that it will affect 85 percent of the market and result in a price increase.
Currently, GST on manmade fiber stands at 18%, manmade yarn is at 12%, and manmade fabrics and apparel do not exceed Rs. 1000 are taxed at 5%. Some chemicals used in the textile industry are also taxed at 18%. Because the GST rate on the final finished product is lower than the rate on the input raw material used in manufacturing, big firms have had trouble collecting refunds on time as a result of this tax structure.Only 15% of the textile business in India is affected by the inverted duty structure, according to the Indian textile industry, but the proposed GST rate hike will raise costs for 85 percent of products. This is likely to put more strain on the industry’s working capital requirements, particularly for Micro, Small, and Medium Enterprises.
According to industry insiders, because about 80% of fabric production in the country is done in the unorganized sector, raising the rate to 12% for fabrics will hurt power loom and handloom weavers. The textile industry will now require additional operating capital, which will be passed on to the customer at a higher price.
The decision to hike the tax rates is negative for both the consumer and the industry, said Sanjay K Jain, chairman of the Textiles Committee of the Indian Chamber of Commerce. While he believes that the industry and market can handle a 3-4 percent increase, he believes that a 7 percent increase is excessive. Low-cost clothes are manufactured by MSME firms, which may see a demand reduction. Many unorganized sector companies may opt out of the GST net in the long term.
On one hand, the government is emphasizing Atman Narhari Bharat and, on the other, these moves of levying high taxes are creating an atmosphere of uncertainty not only for the consumers but also for the manufacturers.
On the business side, it will add to an already strained sector’s financial load, slow its recovery, and impair working capital requirements, particularly in the case of MSME enterprises, which account for 90% of the industry. On the consumer side, it will increase clothing prices, lowering demand. On the government’s side, it may lead to many unorganized enterprises opting out of the GST net in the long term.
To cut out all the confusion around GST rates leading to refunds because of the Inverted Duty Structure, the Government’s move of bringing the rates of inputs and output in line is correct. But instead of increasing the rate to 12%, Government should focus on bringing down the rates of inputs to 5% which will keep the clothing less expensive and will caterto the basic need of the common man.
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Posted by:
CA Tarun Kapoor
AKGVG & Associates