Big Impact of GST on Textile Sector

Textile or Clothing sector is one of the oldest and the largest sector in India. This sector is the largest contributor towards the development of the Indian economy. It provides employment not only to a large number of skilled and unskilled workers but is also a major contributor to the exports and GDP of India. Based on the fibre and processing, there are various segments in the clothing sector in India like ‘Khadi’ and handlooms, cotton textiles (including raw cotton, ginning, yarn, etc), woollen textiles, silk textiles, art silk & synthetic fibre textiles, jute, hemp, & mesta textiles, ready-made garments (Apparels) & Miscellaneous Textile products. With the arrival of GST, government has decided to strengthen the economy especially the textile sector.

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Following are the GST Rates as implement by the Government of India in the textile industry:-

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The rates of GST are higher than pre-GST policies. Natural fibres which were before exempted from tax are now taxed under GST. However, inspite of some demerit of GST on Clothing sector there are many merits of GST. The positive impact of GST in the clothing industry is explained below-

Increase in exports :-

Under GST, input tax credit will be provided as a refund of the tax paid on the input goods or services or capital goods. This would be a significant boost for promoting the export of textile products. Earlier exporters can claim the exemption for duty paid if they export six times the value of duty within a period of next six times, this scheme would lose its significance under GST.

Press Release issued by CBIC on Annual Return (FORM GSTR-9)

Input Tax Credit (ITC)  :-

Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs. Earlier, ITC were not allowed if the inputs are procured from the unorganized sector, and the large proportion of the clothing sector in India is unorganized sector. Under GST, there is proper and smoother input credit system (ITC).

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Reduction in Manufacturing  Costs  :-

GST helps manufacturers by reducing the tax burden on the goods produced by them as earlier it subsumed various fringe taxes such as Octroi, entry tax, luxury tax, etc which increases the cost of manufacturing.

Option of tax payment :-

Even in GST regime, the principal would get the option of sending the inputs or the capital goods for job work (section 55 of model GST law). However, raw materials sent should be received back within 1 year and capital goods should be received back within 3 years. If the goods are not received within this time limit, then supply of goods would be treated as supply of levy of GST. The processed goods could also be  sent directly to customers of principal, provided job workers are registered or the details of job workers place are added as additional place of business  in principal’s registration certificate.

Input credit allowed on capital goods :-

Under GST, there will be input tax credit available for the tax paid on capital goods, which earlier was not allowed ( excise duty paid is not allowed as input tax credit).

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So as earlier the taxes were exempt on the cotton value chain whereas in GST it is taxable which may be a drawback for the clothing industry. But yes, GST will help this industry in long term by getting more registered tax payers under the organized sector. It can also be hoped that GST will help the clothing industry to get more healthy competition in both the global and domestic markets, thereby inducing innovation and creating opportunities for sustainable long-term growth.

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The author of above article is Sameer Batra.

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