The 12 per cent GST rate (lower) recommended by the Arvind Subramanian Committee is likely to have a negative impact on the textile sector, rating agency ICRA said in a report.
The cotton value chain is currently attracting zero central excise duty, unlike the man-made fibre sector, where the fibre attracts excise duty at the manufacturing stage, ICRA said.
Hence, it opined that there is an incentive for the downstream players in man-made sector to avail the Input Credit Tax (ITC).
ICRA pointed out that most of the cotton-based textile players in the value chain operate through the optional route, thereby resulting in lower duties.
The key reasons for the same are exemption on cotton and hence the lower ITC for cotton spinning mills, as a result the cotton yarn manufacturers opt for the optional duty route without claiming ITC and pay zero excise duty.
“With an optional duty structure at the cotton yarn stage itself, the downstream sectors, that is weaving, processing and garments also operate under the optional route. This is reflected in the less than 1 per cent effective excise duty rate applicable to 480 spinning and weaving companies, which accounted for Rs 57,000 crore revenue during FY15,” ICRA VP, Corporate Sector Ratings, Anil Gupta said.
On the positive side, under GST, textile players which are oriented towards domestic markets will be able to avail ITC on domestic capital goods (but not the import duty) as their sales will be subject to GST.
Accordingly, this will reduce the cost of capital investments and, hence, will be positive for the players operating in domestic markets, it added.
“With GST on textile, the textile value chain will become more organised as it will make GST non-compliant suppliers uncompetitive compared to GST-compliant suppliers, as the buyers won’t be able to take ITC,” he added.
The exports will be zero rated under the GST as there will be transparency and availability of full ITC for exporters, which is currently being provided by duty drawback schemes, it said.
Accordingly, ICRA said, the duty-drawback will lose its relevance under GST. However, sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures.