This tax increase will aid the Centre, which is experiencing a revenue shortage as a result of recent fuel duty cuts, by stabilising tax revenues and freeing up funds for welfare initiatives.
On the recommendations of the GST Council, the Central Board of Indirect Taxes and Customs (CBIC) announced that the GST rate on garments, textiles, and footwear would be raised from 5% to 12% with effect from January 1, 2022. The textile and handloom industries are already suffering from the effects of the Covid pandemic, and any proposal to raise the tax would be a death knell for the industry. All textiles and clothing will become more expensive as a result of the proposed GST hike on the textile industry.
Due to rising spending needs and the economic impact of the second wave of the Covid-19 pandemic in the first half of the current fiscal year, both the federal and state governments are under revenue challenges. This tax increase will aid the Centre, which is experiencing a revenue shortage as a result of recent fuel duty cuts, by stabilising tax revenues and freeing up funds for welfare initiatives. It will also spare states from a fiscal cliff when the central government’s GST compensation ends in June of next year. The Centre wishes to correct the inverted duty structure because the GST on man made fibre is 18%.
The possible impactThis would affect 85 % of the industry and roughly 80% of final products.Over 15 lakh jobs in main and ancillary units would be lost as a result of the planned GST increase.Because the unorganized sector accounts for over 80% of fabric production in the country, raising the GST on fabrics to 12% will hurt power loom and handloom weavers.Due to extraordinary price increases in raw materials like yarn, packing materials, and freight, the market is likely to experience a 15-20% price increase in clothing in the near future. The traders lament the fact that individuals who purchase clothing for less than Rs 1,000 will be the most affected.Cloth traders claimed trading activity has been hampered for the previous two years by the Covid-19 pandemic, but is progressively improving due to a decrease in new illnesses in recent weeks. They had good hopes coming with the year 2022 ,but the same was shattered with the above announcement.One of the most frequently mentioned issues in the community is the high inflation, prices of vegetables and FMCG essential goods that people buy, and now if GST rates are raised on the apparel and footwear sectors, it will further strain household budgets.The incremental revenue may also be limited because many small businesses that were in the informal sector prior to GST may revert to their previous status. ? The imposition of high taxes has already created an atmosphere of uncertainty not only for consumers but also for manufacturers.
Industry clearly expresses dissatisfaction with higher GST rates on textiles and clothing:
- Apparel manufacturers seek a delay in the implementation of the GST increase on hosiery items
- The Hosiery Manufacturers’ Association has expressed concern about the Centre & notification on Higher Goods and Services Tax (GST) Rates to be levied on several apparel items beginning January 1, 2022, as it will affect the common man and those in the micro, small, and medium enterprises (MSME) sector.
- Clothing was an essential commodity, but people were experiencing financial hardship as a result of the 5% GST, so traders have been requesting a reduction in GST for several years.
Reasons for Deferment
- Significant increase in garment prices, as cotton prices have risen by 70% in the last year.
- Another increase would result in a significant drop in consumption or a shift to cheaper and lower-quality goods.
- The Centre must withdraw the proposed increase in GST on natural fibers.
- The increase in GST will have a significant impact on the textile industry in Andhra Pradesh.
- Textile trade and industry are stunned by the government’s decision to raise textile taxes, despite the fact that textiles are the second-largest revenue-generating commodity after agriculture. The cloth traders have begun protests against the GST increase and intend to escalate the agitation.
- According to the cloth traders, the current 5% GST levy on purchasers is Rs 1,500 crore, which will be increased to Rs 3,600 crore if the 5% GST is increased to 12%. They claimed that an additional burden of nearly Rs 2,100 crore would be imposed on people in New Year 2022 as a result of an increase in GST.
- Transportation costs have risen significantly as a result of higher gasoline and diesel prices, and the GST increase will be disastrous for textiles, handlooms, and readymade clothing.
- If the Union government does not reverse the increased GST, many textile federations have planned to intensify their protests and agitations.
- Over 60% of citizens and opposition party leaders criticized the GST increase on apparel, textiles, and footwear as “completely unjustifiable.”
More pain for the end-consumer
The notification by the Centre of higher GST rates for several textile and apparel items beginning in January 2022 has come as a blow to micro, small, and medium-scale textile and clothing units, with industry groups claiming that the move will raise consumer prices and fuel inflation. Fixing the rate at 12% for fabrics and garments in an industry where nearly 80% of the units are in the MSME segment will only lead to higher prices for the average consumer.
Cotton is the mainstay of India’s textile industry. According to the Cotton Corporation of India, India is the world’s largest cotton producer, accounting for around 22% of global cotton production (CCI). Exporters argue that the government should not have intervened in the cotton value chain because it is the primary raw material utilised in a variety of other industries.
Cotton is widely used in the home furnishing textile industry. Beginning January 1, 2022, the cotton textile industry will be required to pay enhanced GST @ of 12% on their products, whereas previously, we were required to pay GST @ 5%. Because the cotton textile sector is already burdened by a 70% increase in raw material prices and a nearly 500% increase in sea freight, we have no choice but to shift the net burden of the enhanced 7% GST to the end-consumer.
There is a strong belief that a far more beneficial and reasonable solution will not only resolve the inverted duty structure anomaly but also give a fillip to the industry. The industry and that nation suggest that imposing a 5% rate on the entire value chain would be a far more beneficial and reasonable solution.
(Ruchika Bhagat is the managing director (MD) of Neeraj Bhagat & Co. an ISO 9001: 2008 UKAS certified organization, founded in 1997. Ruchika graduated in 1996, a member of the Institute of Chartered Accountants of India (ICAI) since 1998. She specializes in Business Advisory, Tax, Regulatory and Risk Advisory. She is a strategic adviser in setting up businesses in India for foreign companies and taking care of its compliances.)