GST Will Bring In An Organised, Efficient Textile Value Chain

Trade & Policy

GST Will Bring In An Organised, Efficient Textile Value Chain

In ICRA's view, a 12% rate of GST (Goods And Services Tax) recommended by the Dr. Arvind Subramanian Committee is likely to have a negative impact on the textile sector, especially the cotton value chain, which is currently attracting zero central excise duty (under optional route); unlike the manmade fibre sector, where the fibre attracts excise duty at the manufacturing stage (unlike cotton). Hence there is an incentive for the downstream players in manmade fibre sector to avail the Input Credit Tax (ITC).

Anil Gupta, VP, Corporate Sector Ratings, ICRA Ltd said, "With an optional duty structure at the cotton yarn stage itself, the downstream sectors, i.e. weaving, processing and garments also operate under the optional route.

This is reflected in the less than 1% effective excise duty rate applicable to around 480 spinning and weaving companies rated by ICRA, which accounted for around Rs 57000 crore revenue during FY2015."

On the positive side, under GST, textile players which are oriented towards domestic markets will be able to avail ITC on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets.

"With GST on textile, the textile value chain will become more organised as it will make GST non-compliant suppliers uncompetitive vis a vis GST-compliant suppliers, as the buyers won't be able to take ITC," he adds. "Due to the reduced tax advantage of cotton yarn vis a vis manmade yarn, there can be a gradual shift in the domestic textile industry, which currently operates with a fibre mix of cotton: manmade of 60:40; as against a global average of cotton: manmade of 40:60. However, the above impact will be dependent on the final rates which will be applicable to the sector," he reiterated.

The exports will be zero rated under the GST as there will be transparency and availability of full ITC for exporters which is currently being provided by duty drawback schemes. Accordingly the duty drawback will lose its relevance under GST; however sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures, an ICRA assessment states.

GST will boost textile exports

Textile industry bodies have welcomed the passage of GST bill, terming it as one of the biggest and transformational reforms in the economic history of the country and said it would pave the way for growth of exports. Thanking Prime Minister and the Finance Minister for this historic reform, Indian Texpreneurs Federation (ITF) expressed confidence about the positive impacts of GST on overall economic growth in the next few years and said it would make the manufacturing sector more competitive.

As far as the textile sector, being an essential item for the common man, textile items should be kept under GST with the minimum possible tax slab with the special rates, ITF Secretary Prabhu Dhamodharan said in a statement here. It was an opportunity for the Government to bring the entire textile sector under tax net & this move will bring more transparency in the system & will trigger growth, he said. Tirupur Exporters' Association President A Shaktivel said GST would give a push for export of garments and described it as a "game changing" reform. In a letter to Prime Minister Narendra Modi, he said exporters were happy to note that consensus had been built to pass the much-awaited GST Bill.

MMF sector welcomes level playing field that GST will create

As the country braces for a goods and services tax (GST) regime, the man-made textile segment, long neglected by policy makers, finally expects a "level-playing field" vis-a-vis cotton textiles. The industry has long been complaining that the duty disparity is preventing domestic producers from scaling up operations and, consequently, hurting India's export competitiveness in man-made textiles. At present, while man-made fibres attract a 12% excise duty, cotton fibres attract none.

This duty disparity has distorted the domestic consumption pattern in favour of the cotton fibre, contrary to the global trend. Although the actual GST rate applicable to textile and garment products will be announced in due course, senior textile industry executives say the current disparity in the excise duty rates of cotton and man-made fibre will be "erased", unless the government decides to give some exemption to cotton fibres. Industry executives expect a GST rate of around 15%, if the peak rate is 18%, arguing that textile and garments are essential items.

"Man-made fibre-based products will be more competitive vis-a-vis textiles items based on cotton fibre. This will be a good policy push, in sync with the global realities," said noted textile expert DK Nair, who is also an adviser to South Indian Textile Mills Association. However, both cotton and man-made fibre are also subject to 4-5% state VAT, which will be subsumed by the GST.

However, if the duty treatment of all cotton and man-made fibres remains the same, prices of textile items made of cotton fibre could rise a tad, Nair added. But equal tax treatment will give a push to man-made fibre production and subsequent exports.

GST may push up prices of branded apparel

Branded apparels may get costlier as a result of the implementation of the GST, expected by April 2017. According to industry and experts, tax incidence on branded apparels and other finished textile products could rise at least 3-4%, assuming textiles come under the merit list of GST. "We have found that the tax neutral rate in textiles comes to around 8-9%. Once GST comes into play, we are expecting a lower rate of 12%, out of the two slabs of 12% and 18%. But even at a lower rate, the sector will end up paying higher duties, thereby increasing prices. Hence, from the textiles perspective, it will be inflationary," said Prashant Agarwal of Wazir Advisors, a retail consulting firm.

However, according to Jayesh Desai, director and CFO, Arvind Ltd., the company's internal calculations suggest that at a merit rate of 12% for fabric and 16-17% for garments tend to be revenue neutral. "In such a case, it may not have any inflationary pressure on the garments," said Shah, adding that initial indications of the government seem to hint that apparels could be placed in the merit tax rate.

According to Rahul Mehta, president of Clothing Manufacturers' Association of India (CMAI), there are also talks of branded garments being put under the luxury tax slab, which could be higher than 18%. "We have been making several representations that garments should be taxed at the current revenue neutral rate of 8-9%, anything more than that will kill the industry. It is being said that branded garments will be taxed as luxury. If that is so, then every labeled garment is branded, which means right from garments worth Rs 500 to Rs 3000 and above are branded. Smaller players as well as middle class consumers will be impacted the most by GST," said Mehta.

However, Agarwal says while the immediate incidence of 3-4%, assuming a 12% rate and an almost 10% incidence in case of 18% will result in inflationary trends, in the long run consumers would be able to accommodate the same. "We expect consumers to accommodate this rise in the long run. As a value chain, too many inter-state transactions happen in textiles. Hence, GST is likely to bring in ease of doing business across the value chain," Agarwal added.

GST will help firms cut logistics cost by 1.5-2.5%

The proposed GST will also help companies reduce logistics cost by 1.5-2.5% as they reconfigure their supply chains and bring in three key structural changes to the logistics industry.

First, as India becomes one big market, there will be fewer and larger warehouses. Second, it will lead to a larger number of bigger trucks on road as there is greater adoption of the hub-and-spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations.

GST is expected to save costs to the tune of 1-1.5% of sales over 3-4 years, said ratings agency Crisil Ltd in a note. Eliminating delays at check posts will yield an additional savings of 0.4-0.8% of sales. These cost savings are, however, more likely to be gradual and back ended, as corporates will have to realign their supply chain while ensuring minimum business disruption, it added.

Standard tax rates will allow corporations to move away from the practice of building a warehouse in different states to adhere to each state's tax code. A big packaged consumer goods company could thus make do with one large mother warehouse at critical points in the country and employ logistics companies to manage distribution and supply chains.

Over time, this will lead to development of new or expanded logistics hubs in different regions that would be driven by commercial and economic efficiency considerations rather than regulator matters, said Biswanath Bhattacharya, Partner-Infrastructure, Government and Healthcare practice at consultancy KPMG.

Hard work ahead to implement GST

A lot of hard work remains to be done. The Constitution amendment bill needs to be cleared by legislators in at least half the states by a two-thirds majority. A GST Council has to be set up. Then the actual GST Bill will have to be drafted, and later get ratified by Parliament and legislative assemblies. The rate at which the tax is to be levied has still not been decided. The back-end technology infrastructure needs to be tested, as some states already have. Meanwhile, companies have to get their own internal processes in place so that they can adjust to the new tax system.

Finalising the tax rate is a critical task. There is a compelling reason to keep the GST rate as low as possible without hurting government revenues across the federal architecture. Like all indirect taxes, the GST too is regressive. It is levied at a flat rate on all consumers, irrespective of their income. One of the goals of a good tax system is to depend less on such regressive taxes. So, the GST rate should be kept low. Of course, some of the immediate problem of regressivity will be ironed out since the prices of goods are likely to come down while the prices of services are likely to go up. The consumption baskets of the poor are skewed towards goods rather than services. So, there will be an initial positive redistributive effect as the new tax system kicks in.

Some inevitable teething problems will emerge. But overall, an integrated national market will create economic efficiency. Supply chains will be streamlined. Smooth movement of trucks across state borders will reduce the need to maintain large piles of inventory. Small companies will become more competitive. Tax evasion will come down as companies will need bills to claim tax credits. The ease of doing business will improve.

60,000 officers to be trained; IT infra to be ready by March

As many as 60,000 revenue officials of central and state governments will be trained on GST laws and IT infrastructure framework to prepare them for rollout of the new indirect tax regime by April 2017.

As per the detailed GST rollout roadmap prepared by Revenue Secretary Hasmukh Adhia, the IT infrastructure framework will be ready by March 2017 and a massive outreach and industry sensitisation programme will also be carried out. After the training on GST laws gets complete by December 2016, GSTN will train them on the related IT infrastructure by March 2017.

Goods and Services Tax Network (GSTN) is a non-government company set up by the Centre and states to provide shared IT framework and services to central and state governments, tax payers and other stakeholders. The revenue department has already started stakeholder consultation with the industry in Hyderabad and Jaipur.

The IT network of the Central Board of Excise and Customs (CBEC), banks, RBI, state accounting authorities and states will be ready by December-end 2016, according to the roadmap and the testing and integration of the IT backbone of all stakeholders is slated for January-March 2017. To make life easier in the new regime, the Revenue Department has said no fresh registration will be needed for the existing dealers. Existing VAT/service tax/central excise dealer data are to migrate to the GST architecture. As for new dealers, a single application will be filed online and registration will be granted within three days.

On GST returns, only one filing will be required for both the Centre and state governments. Average tax payers will be using only four forms for filing returns - supplies, return for purchases, monthly and annual returns. While supplies return will be filed on the 10th of every month incorporating the list of suppliers, the same data will be incorporated in the purchase return which will have to be filed on 15th of every month.

These data will be then get populated in the monthly and annual returns and the assessee will just have to sign and send it to the tax department, Adhia said. Small taxpayers who have opted for a composition scheme will have to file return on a quarterly basis.

Besides preparing the IT infrastructure, training tax officials and conducting the outreach programme, both the Centre and states will have to establish a legal framework.