Two associations of manufacturers and retailers have said that the new goods and services tax (GST) slabs proposed for readymade garments will promote a parallel economy, defeating the very purpose of GST.
The Clothing Manufacturers Association of India (CMAI) and the Retailers Association of India (RAI) – the two bodies representing all major companies in textiles and organised retail sectors — will make presentations to the ministries of finance and textiles as well as to members of the GST Council in the next two days to apprise them of their views.
“The step is retrograde,” said Rahul Mehta, chief mentor, CMAI. “The move will set the textile and garment industry back and spur grey market. This will have a wide-ranging impact on all segments including the mid-segment as well as the wedding market, where garments are typically priced above Rs 10,000,” he said.
“All the work that has been done to formalise the economy with the GST regime will be wiped out by increasing taxes based on price points. This will encourage unscrupulous sellers online and illegal merchants to flourish offline,” Kumar Rajagopalan, chief executive officer, RAI, said.
According to sources, the group of ministers (GoM) on GST rate rationalisation on Monday had proposed taxing apparels up to Rs 1,500 at a rate of 5%. While readymade garments priced at anything between Rs 1,500 and Rs 10,000 will be taxed at the rate of 18% and apparels above Rs 10,000 will be taxed at the rate of 28%. The finance ministry has, however, refuted reports on rate rationalisation.
On “sin” products such as tobacco and aerated beverages, the GoM proposed increasing tax to 35% – a move which did not go down well with investors.
On Tuesday, shares of ITC, Godfrey Philips, VST Industries as well as PepsiCo bottler Varun Beverages fell sharply in response to the news.
While shares of ITC decreased as much as 3% intra-day on the BSE, the most in nearly two months, Godfrey Philips and VST Industries fell 3.2% and 2.3%, respectively. These stocks pared some of their losses at the end of trade on Tuesday.
Varun Beverages, meanwhile, closed trade 1.86% down on the BSE, even as the broader BSE Sensex closed in the green at 80,845.75 points.
Mails and text messages to PepsiCo India, Coca-Cola India and ITC elicited no response till the time of going to press.
However, some companies issued clarifications to the stock exchanges. Calling them “only preliminary recommendations”, Varun Beverages said that after deliberations, the GST Council will need to come up with a rate change notification.
Godfrey Phillips said that it “cannot estimate the impact on the company till such time the current GST rate is changed by the process of law”.
But industry sources say that higher taxation on cigarettes will encourage the market for smuggled goods, undermining tax policy objectives and impairing the domestic cigarette market.
Some experts also said that it may lead to lower profit margins for companies.
“These industries already face heavy sin taxes, an increase in GST could further tighten profit margins,” said Shashi Mathews, Partner at IndusLaw.
“Smaller players in these industries might be disproportionately affected due to their limited capacity to absorb additional costs,” Mathews said.
Another tax expert said that adding another GST slab goes against the basic idea of setting up the GoM, which was to simplify the system.
“If this goes forward, there are chances that states may ask the GST Council to move more products from the 28% slab to the 35% slab,” the tax expert said asking not to be quoted.
Some market experts have also argued that higher incidence of tax on cigarettes may not curb tobacco consumption at all, as some consumers may move to consuming bidis and other tobacco products instead.