Impact of GST on Textile Industry

by Vinaya HS on June 27, 2017

in Finance

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One industry that has its eyebrows raised over GST and its impact is the textile industry. Textile industry is one of the oldest and biggest industries in India. Indian textile sector is the largest employer and is a significant contributor in the country’s export. It gives job opportunities to both skilled and unskilled labor in India. The unorganized small scale traditional businesses like sericulture and handicrafts and organized sector including technical and modern technology business like apparel and garments etc are all a part of this sector. More than 35 million people are engaged with the textile industry of India where the share of textile in the total export of the country remains to be around 10% to 11%. This means news on GST is eagerly awaited in this sector.

As market news suggests, the Indian Textile Industry contributes to around 5% to India’s GDP and around 14% to Index of Industrial Production or IIP. The advent of GST will definitely bring an impact in the textile industry.

GST news trickling in seems to give an indication that one major impact the GST is going to have on textile industry is that it is going to charge higher tax rate. Currently, the cotton value chain in the textile sector is not charged any central excise duty and was further supported with subsidy etc. But after the GST implementation, as per the news of GST, the natural fibers like cotton and wool will be taxable under the new regime.

But a deep dive in shows that the tax rate would remain the same for almost all the product categories. According to the rating agency ICRA, the effective tax on cotton was about 5% and on man-made fibers is around 11%. As per GST news, the tax rate is going to be somewhat same even under the new tax laws. In fact, for wool the tax rate may be lesser at 5% than the current 10%. Other than the man-made fibers (MMF), the GST rates for all other categories like cotton, silk, jute, wool have been kept in either zero or lowest tax slab of 5%.

News on GST suggests that looking at the long run, the picture is quite bright. The introduction of GST will imply a better input tax system as per the GST news. Currently the input tax credit is not allowed if the inputs are procured from the unorganized sector. Now the shift from unorganized sector to the organized sector is likely to happen after GST.

In the current tax system, the textile industry pays the excise duty on importing the latest machinery which is not treated as the input tax credit on capital goods, but under the new GST rule as the GST news points out, the input tax credit will be made available for the tax paid for procuring this kind of machinery. Since GST is a unified tax system and it is going to subsume all indirect taxes including octroi, luxury taxes, entry tax etc. it is expected that the cost of manufacturing the products for textile industry will be reduced since these indirect taxes will be removed. Availability of input tax credit will also make the Indian textile industry more aggressive in the international textile market.

If the news on GST from different quarters is to be believed, GST is likely to boost the Indian textile export market because after the roll out of new tax structure, the procedure will be easier and there would be no duty drawback. GST will also bring many non-tax payers into the taxpaying bracket and hence will improve the situation significantly. The textile industry now will be more organized and systematic.

Looking at the pros and cons, it might be concluded that GST might have a neutral impact on the textile industry if not positive. In the current time, we may feel that the tax is going to be charged way higher but for a long term sustainable growth of textile industry, such changes must be adopted and positively accepted. The GST news does seem to be positive for the textile sector in the long run.

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Read more on the latest GST tax rates in India.

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