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GST on textiles: Uniform tax rate through the entire chain is need of the hour

In a welcome move, the government has addressed the issue of fibre neutrality in the recently announced Goods and Services Tax (GST) rates on textiles.

Fibre neutrality was a long-pending demand from leading trade associations, export councils, and local trade bodies of textile-centric states, though the target has moved from fibre to fabric.

While being a highly decentralised sector, textile is the country's second-largest employment generator, involving multiple processes — from fibre to garment. The product changes lots of hands till it is ready to be worn by the consumer. The involvement of a large number of people in different processes – as traders, jobbers, and convertors – requires a uniform rate of tax through the entire chain of conversion from fibre to ready-to-wear fashion garment. This issue needs to be addressed by the GST Council. Currently, the GST rate on fabric is fixed at five per cent, while at the job stage – such as processing, embroidery or other value additions (each of these being a manufacturing activity by itself) – it is deemed to be a service and, therefore, attracts 18 per cent tax.

The present GST rates create accumulated credit in the hands of weavers at the time of selling greige fabric to traders (merchant manufacturer) because the input-stage credit on man-made filaments and artificial yarn is 18 per cent, whereas the GST rate on greige fabric stands at five per cent. Similarly, when traders (merchant manufacturer) send the fabric for further job work – dyeing, printing, embroidery, and other value additions – they are deemed to be a service (job work) and are liable to a GST tax rate of 18 per cent. This results in accumulated credit in the hands of traders, where their input tax credit is 18 per cent at the processing and value addition stage, but they have to pay five per cent on processed and value-added fabric. It would have been better if accumulated tax credit in textiles was refundable in the hands of the weaver or the trader, or both.

Another serious anomaly is the probable tax rate on imported fabric, which, if charged at five per cent, will create a further recessionary trend in the domestic textile industry. At present, fabric imports from China account for Rs 2,56,900 crore annually. The fabric is being imported at a compounded import duty of approximately 26.75 per cent and has caused almost 25 per cent of the domestic weaving sector to shut down. Under the new GST tax structure, imported fabrics can be imported at a basic rate of customs duty, which is 7.5 per cent plus the five per cent GST rate. Therefore, under the new regime, domestic fabric is not going to be cheap while imported fabric will be cheaper. A specific rate of duty needs to be imposed during import of fabric so that the domestic industry gets a level playing field. Let us hope that the GST council shall come out with some remedies that shall help the textile industry adopt the GST regime without further price rise till the fabric stage.

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