Before the government made the excise duty on fabric optional in 2003-04, the textile hub of Surat — where traders temporarily called off a two-week-long strike on Tuesday against the goods and services tax (GST) regime — was a deadly place for taxmen to venture into. One horror story has it that an overzealous excise inspector once landed up at a textile unit there to enquire about the duty the proprietor was paying, narrates a textile industry veteran who has been a frequent visitor to Surat for business activities. “The hapless fellow was grabbed by four people and thrown into a boiler in no time for his audacity,” he told FE.
For decades, Surat has come to be known as a place for cheap saris, thanks to the opaque system where hardly any trader pays any indirect tax on fabric in accordance with the rule books. “It’s the fear of the formalisation of business where every transaction can be tracked for tax purposes under the GST regime that bothers these traders,” he said. Their demand for the removal of a 5% GST on fabric or at least an 18-month moratorium on GST for them is nothing but a sham, he added.
FE spoke to senior executives of half a dozen textile and garment companies who reiterated this view. It’s not just Surat, which accounts for roughly 40% of the country’s synthetic fibre output, such traders in other places like Indore and Bhiwandi (Maharashtra) are also tacitly supporting this agitation and closely watching the government’s moves, they added. They spoke on condition of anonymity as they all have business dealings with fabric traders in such cities. “If the government stands firm, this protest will fizzle out ultimately. But if it budges, it will encourage similar elements in other industries as well,” one of them said.
Currently, the duty incidence goes like this: There is an 18% GST on man-made fibre-filament/yarn, in place of the earlier VAT and excise duties. When the weaver sells the bale to the trader, the trader will have to pay 5% GST. As the textile trader sends the product for dyeing and printing, he will pay processing charges, with a 5% GST. After the cloth is dyed and returned to the trader, he sells it to the wholesaler with a 5% GST.
Thereafter, the wholesaler adds his own profit margin and sells to the retailer with a 5% GST.
The catch is that everybody in chain gets input tax credit against the taxes paid in the previous stage, so there is not really much of a burden on the trader as well due to the 5% GST on fabrics, as it is touted to be.
For its part, the government on Wednesday ruled out any change in tax rate unless there is an anomaly or the rates are unjustified. Central Board of Excise and Customs chairperson Vanaja Sarna said: “It (protest in Surat) is an issue that has snowballed but it is not something which cannot be settled… The issue is that textile sector is taxed for the first time. So anybody who comes into the net would feel the pinch.”
Speaking in the Rajya Sabha on Tuesday, finance minister Arun Jaitley said zero GST on fabrics “will break the input tax credit chain and then the garments/made-ups manufacturers will not be able to get the credit of tax on previous stages”. Also, zero GST on fabrics will result in zero rating of imported fabrics, while domestic fabrics will continue to bear the burden of input taxes.
While the traders in Surat have called off the strike that is expected to have caused a potential loss of Rs 5,000 crore, they have warned of further stir if the government doesn’t come up with a solution in their favour in the next GST Council meeting on August 5. Although the city sells a lot of such cheap, unbranded stuff, it also boasts of some good brands, including Prafful, Parag and Rachna, as well. Nevertheless, the unorganised segment still accounts for the bulk of the business.