Proposes alternatives, including ones that can correct inversion, generate revenue
The GST Council’s last-minute deferment of a proposed rate hike for lower-end textile items from the existing 5 per cent to 12 per cent, has given a reprieve to the industry.
“The committee looking into rate rationalisation, which has been tasked to review the rates for textiles as well, will try to ensure minimum pain for MSMEs while balancing it with the government’s need to generate revenue and correct the inverted duty structure. Various possibilities could be explored,” an official tracking the matter told BusinessLine.
The industry has proposed a number of alternatives, pointed out Sanjay Jain, Chairman, ICC National Textiles Committee. One is imposition of a uniform GST of 8 per cent on all items. “Another option is to maintain status quo till the fitment committee announces new slabs and then move the 5 per cent slab to closest new slab,” Jain said.
Yet another proposal is to impose a 7 per cent GST on cotton garments, yarns and MMF fabric and a 12 per cent GST on MMF yarns and fibres. “This is a workable option as the value addition will take care of the inversion gap of 5 per cent in tax rates for MMF fabric. This will lead to a need for minimal or no refund. Otherwise, the whole chain will be free of inverted duty. Moreover, the government will get extra revenue,” said Jain.
An ‘inverted duty structure’ is one where there is a higher duty on inputs than finished products. This results in a need for a refund of unutilised input tax credit for the industry which affects companies’ cash flows and the government’s revenues.
In the textiles sector, while MMF fibre and yarn attracted GST of 18 per cent and 12 per cent, respectively, a 5 per cent GST was applicable on all kinds of fabric. All types of garments had a GST levy of 12 per cent while garments below ₹1,000 attracted a lower 5 per cent.
According to sources, the inversion in the duty structure resulted in annual refund amount exceeding ₹4,000 crore.
“The amount is expected to grow, considering that in the first year (of GST implementation), refund of accumulated ITC was not allowed,” the source explained.
To correct the inverted duty structure in the textiles industry, the GST Council, in its meeting on September 17, 2021, proposed to raise the rates for textiles of any value to 12 per cent, effective from January 1, 2022. It also decided to lower the GST on MMF fibre to 12 per cent.
Protests from MSMEs
There was, however, a slew of protests from the MSME sector and various States, including Gujarat, Tamil Nadu, West Bengal and Rajasthan, against the rate hike for garments.
“Higher GST was detrimental to consumers buying lower-end products. Majority of buying in India is below ₹1,000 for apparel. This could have resulted in lesser buying, thereby impacting traders and MSME manufacturers,” said Animesh Saxena, President, Federation of Indian Micro & Small and Medium Enterprises .
The GST Council, in its meeting on December 31, decided to defer the proposed rate hike and refer the matter to the rate rationalisation committee, which is expected to submit its report in February.