The textile industry has urged the finance ministry to reduce the proposed 18% goods and services tax (GST) rate on man-made fibres and yarn to at most 12% to somewhat correct a historical imbalance in favour of the country’s cotton-based textile structure. While the government has kept GST for cotton fibre and yarn at 5%, the same as now (although there is no excise duty on cotton fibre and yarn now, states impose a 5% VAT), the tax rates for man-made fibre and yarn have been fixed at 18%. Although the current tax incidence for man-made fibre and yarn producers is roughly around the same level (17.5%, including both excise duty and value-added tax), it didn’t bridge the duty existing differential with the cotton fibre and yarn.
Noted textiles expert DK Nair said three things need to be sorted out urgently. First, this was a great opportunity for the government to fix the GST rate for man-made fibre at best at 12% to encourage companies to diversify from cotton-based textile segment. Second, the GST rate for man-made fibre-spun yarn has been fixed at 18%, way above the current tax incidence of around 5% (while there is an optional excise duty, states impose a 5% VAT). Third, while the GST rate for job work in textile yarn and fabric manufacturing segments has been announced, the government is yet to declare the tax rates for the job work for garments and made-ups, which will lead to unnecessary confusion.
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According to O P Lohia, chairman of Indo Rama Synthetics, the GST should have a uniform rate structure for all fibres and this disparity between natural and man-made fibres must end.
Confederation of Indian Textile Industry (CITI) chairman J Thulasidharan hailed the government’s decision to trim the GST rate for job work in textile yarn and fabric manufacturing activity from the proposed 18% to 5%. But he also pointed out that the high rates of 18% announced for MMF, fabric and yarn, dying and printing units and embroidery items can lead to an increase in input costs and can adversely affect the entire textile value chain. This will come as big blow to small fabric manufacturers in powerloom, knit and processing segments and prevent seamless flow of input tax credit and allow breakage of value chain, he added. CITI has already taken up the issue with the textile ministry.
The industry has been demanding a reduction in the excise duty on man-made fibres, saying such a disparity is preventing domestic synthetic fibre producers from scaling up operations. The huge duty difference has ensured that India’s textile market remains cotton-driven, in a stark contrast with the trend globally, apart from eroding the country’s export competitiveness in the man-made fibre segment. While man-made fibres account for around 60-70% of the world’s total fibre consumption, they make up for just 30-40% of Indian fibre demand (with cotton textiles contributing the rest).
The excise duty on man-made fibres, which was as low as 4% in 2009-10, was raised by the previous government. This came as a shocker to synthetic fibre producing companies that had invested much in expanding capacity to cater for growing domestic demand for man-made fibre, according to Lohia. Also, as Lohia pointed out, the hike in the excise duty massively dented growth in the synthetic fibre segment—from roughly 10% in 2009-10 to a meagre 0-5% annually in recent years.