GST and its’ impact on Indian textile and clothing industry

Akhi Akter       
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The Goods and Service Tax (GST) is the biggest and most significant tax reform in India that has been replaced the complex multiple indirect tax structure from 1 July 2017. Announcement of the tax rate has come as a blessing for some sectors of Indian textile industry, at the same time, it has come as bolt from the blue for some sectors, especially for the people related to unorganized business segment.

GSTGST stands for Goods and Service Tax, which is applied on services and goods at a national level with a purpose of achieving overall economic growth. GST is particularly designed to replace the indirect taxes imposed on goods and services by the Centre and States and GST bill was officially introduced in 2014. The Constitutional Amendment Bill for roll out of GST was passed by the Parliament on 8 August 2016, followed by ratification of the bill by more than 15 states and enactment of the bill in early September 2016. GST is being fully implemented from 1st July 2017.

Impact of GST on Indian textile industry

There is no doubt that textile industry, the second largest industry after agriculture, is playing a major role in the Indian economy, which contributes 14 percent to industrial production and 4 percent to GDP. The Industry contributes more than 10% in total export and 100% FDI is allowed by the Government under the Automatic Route.

The Industry is divided into Two Segments, first one is unorganized and another one is organized. The unorganized sector consists of Handloom, handicraft, small and medium-scale mills where organized sector consist of spinning, apparel and garments segment, which apply modern machinery and techniques. There is a great impact of GST on both segments.

Negative impact on MMF/yarn and unorganized segment

Most of the apparel makers and wholesalers are not happy with the GST because of its high rate and unwillingness of unregistered dealers to comply with GST. They are worried about that the implementation of the GST tax has brought business to a standstill as their unregistered suppliers and customers try to stay out of the ambit of the new tax regime. The unorganized sector makes up about 85% of the total Indian retail market, according to a report by India Brand Equity Foundation (2016), and is expected to reach 87% by 2019. Of women’s apparel, the fastest growing apparel segment in India, only 11% is made up by the branded market, as per a report of Avendus Capital (June 2017).

These unregistered dealers do not even have an agreement on the houses they live in, no ration card, no sales tax numbers, what will they do with GST- is a question of apparel makers.

Local producer and buyer of manmade fibre and manmade yarn will face a great challenge for 18% GST tax. According to table 1, while silk and jute are totally freed from the GST purview, the rate structure for the textiles is decided respectively 5 percent and 18 percent for cotton fiber and manmade synthetic fiber. The GST rate on apparels is also decided on a category basis, as Apparels below INR 1000 will be attracting 5 percent GST and exceeding INR 1000 will be taxed at 12 percent.

Textile industry body The Confederation of Indian Textile Industry (CITI) on 3 July has petitioned the government to cut the GST rate on manmade fiber and yarn to 12 percent from 18 per cent, as the higher levy will pressurize Indian producers to source yarn and fabrics at a cheaper rate from China and Indonesia. Mill gate prices of MMF/synthetic fiber and yarn are higher in India compared to China, Indonesia and South Korea and these countries have lowest tax and high export incentives to manufacture MMF textile goods in the global market.

TBL1

Profits of small and medium enterprises and unorganized mills are very low. The SMEs of MMF/synthetic fiber and yarn may not be able to withstand the market pressure for the high rate on MMF.

“Disadvantage… will keep surmounting as India’s free trade agreements with Association of South East Asian Nations and South Asian Free Trade Area will allow imports of these items from countries like Indonesia, Thailand and Bangladesh which offers MMF textile goods at low and cheap prices,” the CITI Chairman said.

The power loom sector would be badly hit by GST. This sector is already struggling and still that remains as an unorganized sector. P. Eswarmoorthy, secretary of the Chennimalai Powerloom Association, recently said, “The government should have at least streamlined the process in a phase-by-phase manner before implementing it. The GST taxation procedure is too complicated.” Representatives of Telangana State Federation of Textile Associations, and cloth merchants associations submitted memorandums to the minister against the imposition of the GST on textiles and sought his interference to urge the Centre to exempt the textiles industry from the GST.

The tax on the job works will mean a huge burden on micro, small and medium enterprises, or MSMEs. Job workers, which form a huge chunk of the state’s substantial textiles sector and are largely part of the unorganized sector, have been brought into the tax structure for the first time. It will harm the sector, say industry stakeholders.

Positive sign also prevails

Along with the negative feedback, there is some positive reaction also. The Garments Manufacturer and Wholesalers Associations welcomed implementation of the GST and said there is need for uniform policy of GST at 5 percent for all ready-made garments and for simplifying the HSN codes for garments.

TBL2

As seen in the table 2, GST rates seem more or less in line with the existing indirect tax structure in case of cotton and synthetic fabrics, implying that the new law is unlikely to have any material consequence on these fronts. The business involved in manufacturing woollen and silk fabrics, the announced rates come across as a positive sign.

In fine, it is easily realized that the 18% tax rate for the man-made fiber and yarn will adversely impact the whole textile sector as uses of man-made fiber and yarn are increasing day by day. In addition, strong player like China is remaining in the international market who exports those items in global market. On the other hand, the GST structure will help to turn into organized segment from unorganized segment and it could be the biggest long-term benefit from GST, despite the short-term inventory adjustment problems.

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