GST: Implications for Indian textiles

India's Goods and Services Tax (GST) has the potential to make the country's textile industry more competitive.A long-awaited taxation reform aimed at “One Nation, One Tax” became a reality in India when the Goods and Service Tax (GST) Act was passed in Parliament on March 29 this year and came into effect from July 1.The act is a landmark reform in the Indian taxation system, which was gripped in a plethora of multiple taxes levied at the central and state level. The unification of the tax rate is expected to bring various advantages for the entire nation in terms of minimal cascading effect of indirect taxes, reduction in transaction cost, improved competitiveness, enhanced transparency in the value chain, decline in the tax burden for consumers, etc.The various GST tax rate slabs - Nil rated, 5 per cent, 12 per cent, 18 per cent and 28 per cent - for different products may bring some product categories within the tax bracket that were earlier either fully or conditionally exempt from most of the taxes at the central and state level. This will be beneficial in terms of widening of the tax base and tax collection for the government, but the industries in the unorganised sector may face challenges in terms of increased compliances and the high cost of acquiring production intermediaries during the initial phase of implementation of GST.At this juncture, GST could either be a milestone or a millstone for respective industries as assurance of the benefits that will accrue in the long run is a reality that is yet to be tested.Scenario Before GSTThe textile industry is one of the most fragmented industries in India. As the industry is mainly comprised of Micro, Small and Medium Entrepreneurs (MSMEs) in the unorganised sector, it has by default been exempt from taxes and compliances. At the same time, given the importance of the textile industry's contribution to employment generation, the GDP and foreign exchange, the government has nurtured the big players in the sector by means of nil or low taxation, capital and interest subsidies, refund of taxes through the duty drawback scheme for exporters, etc. Further, most of the players across the value chain operate on the optional route and pay zero excise duty provided they don't claim the Input Tax Credit (ITC), thereby resulting in the incidence of nil or low duty.These tables provide a broad idea about the extent of benefits the Indian textile industry had been receiving during the pre and post GST regime.Confidence vs Concerns After the application of GST, there will be an increase in the effective tax rate, which is likely to have a negative impact for the textile industry in terms of high cost of production, increased compliances and high administration cost. For instance, the tax slab in the case of readymade garments will be 12 per cent under GST instead of the pre-GST slab of 4-5 per cent VAT and 2 per cent excise duty. This higher tax slab will increase the price of readymade garments for the consumers.Man-Made Fibre (MMF) or Man-Made Yarn would attract 18 per cent GST as compared with 5 per cent GST on cotton and cotton fibre/yarn, thereby resulting in a rise in input cost and adversely impacting the entire synthetic value chain in India. Due to this rise in cost of synthetic textile inputs, the MMF sector may further lose its cost competitive advantage in the global textile market, which is significantly shifting from the use of cotton yarn to MMF.[caption id="attachment_11358" align="alignnone" width="848"]

Pre-GST Regime - Tax Structure Applicable for the Textile Sector[/caption]Apart from the financial strains in terms of an increase in the working capital requirement and greater inter-dependence on the supply chain to claim Input Tax Credit, the other significant concern is around migrating to an automated filing system. This will make the transition even more challenging as several of the units are in the SME category and thereby will require further skills and training to file returns on time.Despite these concerns pertaining to the levy of GST in the textile industry, there is an unrelenting confidence that GST will boost the economy and industry in many ways. First, there is a likelihood of more and more units shifting towards the organised sector. A major segment of the textile industry currently operates under the unorganised sector, thus creating a gap in the Input Tax Credit system. If the registered taxpayers buy inputs from the unorganised sector, they cannot avail of this credit facility. GST on textile will bring a significant change in the ITC system and in turn reduce the gap between the organised and unorganised sectors of the industry.Second, GST would ensure transparency in the current taxation system pertaining to the textile industry as many units were out of the tax net and remained untraceable. As ITC claims will have to be backed by the full information chain of purchases and sales, this would enhance the transparency in the taxation system. Third, earlier Indian textile manufacturers needed to pay heavy excise duty while importing capital goods. This excise duty added to the cost of production. However, with the launch of GST, the excise duty will have an ITC facility and it will decrease the total import cost for capital goods.Fourth, GST would streamline the process of claiming ITC, thus allowing the textile industry to become more competitive in the export market.Fifth, currently, manufacturers and traders are not inclined towards exports due to the extensive procedure costs and delays in the processing of duty drawback. Under GST, the system of duty drawback will lose its significance. Input Tax Credit will be provided as a refund under GST instead of current duty drawback schemes. This will be a significant boost for promoting the export of textile products.As India moves towards a more systematic and less complex tax structure it will lead to a boost in further investments from foreign participants, streamlining of movement of goods across the country and will help the textile industry in the long run by getting more registered taxpayers under a well-regulated system. It can also be hoped that GST will help the textile industry become more competitive in both the global and domestic markets and create opportunities for sustainable and long-term growth. Dr Rakesh Mohan Joshi is Professor at the Indian Institute of Foreign Trade (IIFT) in New Delhi, India.Dr Jacqueline Symss is Assistant Professor at IIFT, New Delhi.Rashmi Taneja is a Research Scholar at IIFT, New Delhi.