How the Goods and Services Tax Affects India's Textile Sector
The Goods and Services Tax (GST) significantly influences India's textile industry, a major employer and export contributor. While it introduces higher tax rates for natural fibers, GST aims to streamline input tax credit, reduce manufacturing costs by subsuming various indirect taxes, and allow ITC on capital goods. These changes are expected to boost the sector's competitiveness in both domestic and international markets, ultimately fostering sustainable growth.
India's textile sector is a major employer, providing jobs for numerous skilled and unskilled individuals. This industry accounts for roughly 10% of the nation's total annual exports, a figure expected to rise with the introduction of the Goods and Services Tax (GST). GST will influence the entire cotton value chain within the textile industry, encompassing all types of apparel for men and women, such as shirts, trousers, sarees, and footwear. Many small and medium-sized enterprises previously opted for a route that imposed zero central excise duty on these items. In the fiscal year 2011-12, the Ministry of Textiles reported total textile exports worth US$ 33,161.74 million and textile machinery production valued at Rs. 5,280 crore. More information is available on the official website: http://texmin.nic.in.
Advantages of GST for the Textile Industry
While GST is projected to impose a higher tax rate on the textile industry compared to previous regimes, and natural fibers like cotton and wool, which were previously exempt, will now be taxed, the sector as a whole is anticipated to gain from its implementation through several key changes:
Streamlined Input Tax Credit System
A substantial part of India's textile sector functions within the unorganized economy or under the composition scheme, leading to interruptions in the input tax credit (ITC) flow. Currently, registered taxpayers cannot claim ITC if they source inputs from businesses under the composition scheme or from the unorganized sector. GST is set to establish a more streamlined ITC system, which is expected to encourage a shift towards the organized sector.
Reduced Manufacturing Expenses
GST will likely absorb various indirect taxes such as Octroi, entry tax, and luxury tax. This integration is expected to reduce manufacturing expenses for businesses within the textile industry.
Input Tax Credit for Capital Goods
The current system makes importing advanced textile manufacturing technology costly because excise duty paid on these imports is not eligible for input tax credit. However, under GST, businesses will be able to claim input tax credit on taxes paid for capital goods, thereby lowering the cost of technological upgrades.
GST Rates and HSN Codes for Cotton Products
The following table outlines the GST rates and HSN codes for various cotton products, including dhotis, sarees, shirting, and furnishing fabrics.
| Cotton Composition | HSN Code | GST Tax Rate |
|---|---|---|
| Products with more than 85% cotton content & weight is less than 200 gm/sq mtr | 5208 | 5% |
| Products with more than 85% cotton content & weight is greater than 200 gm/sq mtr | 5209 | 5% |
| Products with less than 85% cotton content, mixed with additional fabrics & weight is less than 200 gm/sq mtr | 5210 | 5% |
| Products with less than 85% cotton content, mixed with additional fabrics & weight is greater than 200 gm/sq mtr | 5211 | 5% |
| Other Cotton Products | 5212 | 5% |
GST Rates and HSN Codes for Synthetic Filament Yarn Products
This table details the GST rates and HSN codes applicable to synthetic filament yarn products, such as parachute fabrics, tent fabrics, polyester shirting, nylon sarees, and rayon brocade.
| Yarn Specification | HSN Code | GST Tax Rate |
|---|---|---|
| Synthetic Mono filament of 67 Decitex or more and of which No cross sectional dimensions exceed 1 mm; strips & the Like of synthetic textile material of an apparent width not exceeding 5 mm. | 5407 | 5% |
| Artificial Mono filament of 67 Decitex or more and of which No cross sectional dimensions exceed 1 mm; strips & the Like of synthetic textile material of an apparent width not exceeding 5 mm. | 5408 | 5% |
Boost for Textile Product Exports
GST is expected to simplify the process for claiming input tax credit, which will enhance the textile industry's competitiveness in global markets. Prabhu Dhamodharan, Secretary of the Indian Texpreneurs Federation (ITF), supports this view. The ITF's official website is http://www.itf.org.in.
Presently, manufacturers and traders often hesitate to engage in exports due to high procedural costs and delays associated with processing duty drawbacks. Under the GST regime, the duty drawback system will become less relevant. Instead, input tax credit will be issued as a refund, replacing existing duty drawback schemes. This change is anticipated to significantly encourage the export of textile products.
The Export Promotion Capital Goods (EPCG) scheme currently allows cotton-based textile exporters to claim duty exemptions if they export goods worth six times the duty value within six years. It is anticipated that this scheme's importance will diminish under GST.
Concluding Thoughts
Although the textile industry might face some challenges, such as increased tax rates and the discontinuation of certain benefits within the cotton value chain, GST is largely expected to provide long-term advantages. It aims to integrate more taxpayers into a structured system and is hoped to boost the industry's competitiveness in both international and domestic markets, fostering sustainable growth opportunities.