Leading to higher refunds, affecting govt revenues
The GST Council meeting on Friday is expected to take a call on removing the anomaly of inverted duty structures for footwear and textile industries. This may result in a higher price for consumers.
The textile sector uses a variety of components with different rates. For example, the rate on cotton yarn is 5 per cent while it is 12 per cent on manmade yarn. For job work, the GST rate is 5 per cent. Similarly, many inputs such as chemicals attract a GST of up to 18 per cent. However, for garments and made-up articles, it is 5 per cent of the sale value not exceeding ₹1,000 per piece and 12 per cent for articles of sale value exceeding ₹1,000 per piece.
According to sources, the lower duty on finished products creates an inversion and consequently the annual refund amount exceeds ₹4,000 crore. “The amount is expected to grow, considering that in the first year (of implementation of the GST), refund of accumulated ITC (Input Tax Credit) was not allowed,” a source explained. The Textile Ministry, too, has pitched for removing the inversion to free the sector from the burden of taxes, including accumulated ITC.
Keeping this in mind, the GST Council’s Fitment Committee was of the view that “dual rate on readymade garment and made-ups be avoided. Readymade garments and made-ups, irrespective of value, be placed at uniform rate of 12 per cent.” There is also a proposal to lower the GST on some yarns from 18 per cent to 12 per cent.
Another source explained that the ad valorem rate would ensure that lower-rate garment suffer a lower tax in absolute terms. He said the rate calibration will not have any significant implication for the consumer. “In the long run, as the sector grows, it would benefit consumers and the economy as with the streamlining of the tax structure, the textile industry would grow more rapidly, and with increased production and economies of scale, costs and prices would go down,” he said.
For the footwear sector, the proposal, according to sources, is to raise the GST rate to 12 per cent from 5 per cent for products with value up to ₹1,000 per pair. Items priced above ₹1,000 will continue to attract 18 per cent. “Inputs attract GST of 5-18 per cent. As more than two-thirds (in value term) of footwear is sold at a retail price up to ₹1,000, it means 5 per cent GST. This is leading to a refund of almost ₹2,000 crore per annum,” a source explained.