According to tax experts, the recent increase in the goods and services tax (GST) on finished products such as garments, textiles, and footwear will have severe financial implications for MSMEs with a major impact in that sector.
On November 18, the Finance Ministry announced a 7% rise in the goods and services tax (GST) on finished goods such as garments, textiles, and footwear, from 5% to 12%, effective from 1st January 2022. The GST rate on fabrics has been increased to 12 percent from 5 percent, and the rate on garments of any value has been raised to 12 percent, compared to the previous rate of 5 percent on items priced up to Rs 1,000.
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As per the MSME registration portal Udyog Aadhaar, there were 6,51,512 textile manufacturing MSMEs registered between September 2015 and June 2020, with 4,28,864 apparel MSMEs.
Experts predict that the GST increase will put more strain on the industry’s working capital requirements, particularly for SMEs. Increased tax rates could put extra financial strain on the MSME sector, which is already suffering from slower sales and higher input costs. It may also result in a cost increase for end users.
The move to standardise tax rates across the supply chain, on the other hand, should benefit the industry in the long run by releasing blocked working capital in the form of accumulated ITC.
The proposed increase is intended to remedy the inconsistencies in the refund of Input Tax Credit (ITC) due to the inverted duty structure.
In an inverted duty structure, higher taxes are levied on inputs and lower taxes are levied on outputs or finished products. Simply stated, firms must pay a higher GST rate on raw materials than they do on finished goods.
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Inverted duty structures have been addressed by the GST Council for several industries, although they still exist for footwear, textiles, pharmaceuticals, and fertilisers.
Because of the higher taxes on raw materials compared to completed goods, a refund of the unutilized ITC under the GST’s inverted duty structure has been a long-awaited issue for businesses. By eliminating the previously existing cost disparity, all garments and footwear will be subject to a higher tax rate. The MSMEs will be the hardest hurt, since the pricing of these products will rise. The amount of working capital required will also rise.
A difference in tax rates based on price was important for small businesses since it allowed them to keep costs low in a sector that generated non-premium/ non-luxury goods.
The sector’s ability to stay in business will be hampered by the uniform rate. Another possible effect would be that smaller players would be pushed into the unorganised sector.
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