Implications of GST on textiles sector

Textiles is one of the most important industries for India in terms of its share in GDP, employment and exports. The industry contributes 2 per cent of GDP, 10 per cent to manufacturing output and 13 per cent of India’s export earnings. On the employment front, it provides 50 million jobs directly, and approximately 60 million indirectly. India’s contribution to total world exports is 5.12 per cent . There is indeed huge scope for an improvement.

CHANGE IN TAX RATES

Currently, fabric is imported at a compounded import duty of 26.75 per cent, which will now change to a basic duty of 7.5 per cent plus a GST rate of 5 percent. Cotton fibre and manmade synthetic fibre will attract a GST rate of 5 per cent and 18 per cent, respectively. The current excise is zero for cotton fibre and 12.5 per cent for man-made fibres, however, both face a 4 to 6 per cent of VAT in different states. Silk and Jute are exempted in the GST ambit. In case of Apparels, a distinction has been made based on price- apparels worth less than rupees 1000 will attract a GST rate of 5 per cent, and for more than 1000, the rate will be 12 per cent. Readymade garments will attract a tax rate of 12 per cent. A tax rate on merchant service has been introduced at 5 per cent.

ANTICIPATED IMPLICATIONS

Cotton fibre is a definite gainer, an increase in production of Cotton is expected in the new regime. Overall, the rates have declined in the new regime, creating space for the industry to increase production capacity. This enhanced capacity of production has a domestic and trade-related impact, which we come back to later. GST will bring some qualitative changes in the industry as well.

Currently, the industry is marred by fragmented supply chain. With the introduction of GST, development of a textile value chain is expected. Along with this, a mechanism of self-compliance is expected to keep revenue coming, in spite of tax rate decline overall. Complexities in classification of goods, and consequently on the tax to be imposed is another major bottleneck in the industry. GST is expected to solve the product categorizationconflicts arising out of different taxations. Such clarity implies integration, which will strengthen its bargaining power and export potential.

An increase in production capacity along with consolidation, has two important implications arising out of the same factor of expected price decline. In case of a price fall, competitiveness of the sector will rise, entailing increased export potential. On the other hand, domestically, the price decline is a negative outcome for manufacturers, if not supplemented with another measure to uphold their interests.

WAY FORWARD

Positive changes accruing to the textiles sector will work in complementarity with the special focus of the government of India on this sector. A higher funding to improve logistics and labour skilling is expected to boost efficiency and yield.Finally, GST shall be looked at as a tax reform, aimed at simplifying tax structure and increasing compliance. Any effect on the sector, positive or negative must pass through the prism of this fundamental feature, before expecting it to achieve multiple objectives.