Garment Industry Demands Low And Uniform Tax Structure Under GST Regime

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Garment Industry Demands Low And Uniform Tax Structure Under GST Regime

The garment sector has asked the Union government to come up with uniformly applied tax rate of five per cent across the entire textile value chain under the forthcoming GST regime.

In a representation made to the Union finance and textile ministries as also state governments, the Clothing Manufacturers Association of India (CMAI) has said that uniform and low GST rate will go a long way in removing the anomalies existing in the present tax regime where various segments of the industry pay differential rates of duties. This variable duty structure has been making the textile value chain much more complex in nature and thus the industry has always struggled to realise its true potential. The textile body says that low and uniform GST will significantly help build a much stronger and efficient value chain in the country where the textile industry contributes quite heavily to the GDP -- contributes 10 per cent to the overall manufacturing production; provides direct employment to 45 million individuals and generates 60 million indirect jobs. With textile commodities holding a seven point weightage in the Consumer Price Index (CPI), it is an essential commodity in the Indian consumption basket. More importantly, CMAI is of the view that this five per cent low GST rate (as against current effective rate of around 6 per cent) will not only ensure much higher compliance by the industry, but will also bring in a much higher revenue to the exchequer.

As per an E&Y study, even with 50 per cent compliance from the industry, tax revenue across the value chain under a uniform GST rate will see an increment of Rs 7,000 crore. Under the current taxation regime, different segments of the industry attract variable duties (ranging from nil to as high as 12%). This has not only created unhealthy competition within the industry but also adversely impacted the compliance level to a large extent.

"A uniform and low tax rate of five per cent can be a big game changer for the entire textile basket of the country. It can be a holistic prescription and solution for multiple issues that have been bogging down the industry. Such an approach under the GST can transform the textile industry into a single market with predictable tax system, enabling increased value addition, employment, and exports," says Rahul Mehta, president, CMAI, who is of the view that a low and uniform GST rate would lead to creation of a unified textile industry where fibre neutrality, innovation, and technology will contribute to productivity efficiency in a major way.

"The differential rates of duties will only fail the very purpose of rolling out GST in textiles. The fragmented nature of our textile industry only adds to its complexity and hence it is imperative to address this issue in a much comprehensive manner. Through the application of a uniform low GST rate across the sector, we can ensure a faster and sustained growth for the textile industry," states Rakesh Biyani, vice president, CMAI and joint managing director of Future Group.

According to Biyani, GST applied uniformly across the sector will propel domestic production, and facilitate and encourage voluntary compliance in the sector. This growth would enable India to achieve its target of generating 35 million jobs, and attracting investment worth $200 billion by 2025.

CMAI says that the current tax system is encumbered with exemptions, concessions, blocked inputs, and tax cascading. Fabrics are exempt under both the central excise and the state VATs. The effective tax rate on garments is also very low (1.2% under excise, and five per cent under state VAT). The total output taxes from the sector are estimated to be around Rs 3,400 crore. There are supplementary revenues from blocked taxes on production and distribution input in the sector (example: synthetic yarn, accessories, dyes, and transportation, advertising, and marketing services).

A comprehensive uniform and low GST rate provides an opportunity to not only remove the inefficiencies associated with exemptions and cascading in the sector, but also increase government's revenue by three fold. Currently, fabrics are fully exempt from taxes. They account for as much as three quarters of total consumption spending on textiles, estimated to be Rs 4.34 lakh crores in 2015-16. Extension of GST to both fabrics and apparel will lead to a very substantial expansion of the tax base. Assuming even a modest 50% compliance in the sector, a 5% GST would generate revenue of Rs 10,850 crore for the government. This thus constitutes incremental output tax revenue of more than Rs 7,000 crore for the government.

The GST Council has proposed a four-tier rate structure of 5 per cent, 12%, 18%, & 28% for various goods and services. There are also exemptions to be made under GST.