Relook at inverted duty structure for textiles, the main agenda – The Hindu BusinessLine

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A major bone of contention has been the proposed hike in rate for textiles from 5 per cent to 12 per cent with a number of States demanding a rollback

Industry may get some relief; rate rationalisation unlikely to be taken up

The one-point agenda for the 46th meeting of Friday’s GST Council is to review the new taxation regime for textiles that is to come into effect from January 1. The textile industry is likely to get a relief.

Fear of job losses

The proposed hike in the rate for textiles from 5 per cent to 12 per cent has become a major bone of contention with many States demanding a rollback saying it would lead to job losses and closure of a large number of units. The Centre has also received a flurry of representations for putting off the new regime from the industry.

“Textile GST is expected to be the main point of discussion. It is more of a political issue now than economic,” a government source said.

At its previous, September 17, meeting in Lucknow, the Council had decided that “GST rate changes in order to correct the inverted duty structure in footwear and textiles sector, as discussed in earlier Council meetings and deferred for an appropriate time, will be implemented with effect from January 1, 2022.”

An inverted duty structure means higher rates on inputs and lower levies on output. This results in refunds to industry affecting cash flows for companies and revenue collections for the government. Consumers do not gain anything.

Inverted duty structure

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.

There are representations from the footwear sector, too, but the Council is unlikely to revise its decision there.

Many rates

As on date, there are multiple GST rates — the four main ones of 5, 12, 18 and 28 per cent, and some special rates such as 0, 0.25, 1 and 3 per cent. There has been a thinking for long to reduce the number of rates by, say, merging 12 per cent and 18 per cent slabs and introduce a 15 per cent rate. The GoM was to suggest the best possible option.

Other terms of reference for the GoM on rate rationalisation include reviewing the set of exempted goods and services with the objective of expanding the tax base, eliminating the breaking of the Input Tax Credit chain and re-looking instances of inverted duty structure.

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