Weaving it Right

What is the issue?

Recent GST rate rationalisation in textile sector is a concern for already stressed MSME sectors.

The manmade fibres (MMF) sector had an inverted duty structure with GST rates for
- Fibre and yarn – 18%
- Apparel below Rs 1000 – 5%
- Apparel above Rs 1000 – 12%
Inverted duty structure occurs when the tax rate on inputs is greater than the tax on the finished product.
In the case of cotton sector, the inverted duty problem does not exist. The GST rates were
- Fibre and yarn – 5%
- Apparel below Rs 1000 – 5%
- Apparel above Rs 1000 – 12%

MMF Sector - The Centre had sought to correct the inverted duty structure of MMFs
- All the finished product rates was raised to 12%
- The raw materials (Fibre and yarn) rates were flattened to 12% from 18%.
Cotton Sector - To rationalise rates across the sector, the 5% slab was sought to be removed in the case of cotton fabrics as well.

Rationalising and lowering rates would address the inverted duty structure problem prevailing in MMF sector and make Indian textile sector competitive.
Inverted duty structure build-up credits and cascade costs and block the crucial working capital for the industry.

For Manufacturers the government’s decision appears to be a mixed bag.
For MMF manufacturers the decision seems good.
It will save a lot of working capital.
It will reduce the costs related to accounting.
It will help to resolve the input tax credit residues accumulate because of inverted tax structure.
However the representatives of other segments have expressed their concern.
For MSME sector that dominates the textile sector the decision is a concern.
It already faces decreased business due to pandemic induced closures.
Also there is a huge rise in the price of the cotton yarn (30%-40%).
This decision is expected to significantly increase their cost of production.
Hence it will be difficult to market the products.
Similarly manufacturers dependent on the cotton value chain also disapprove of the GST hike on cotton-based products.

In the guise of correcting rate anomalies, the Centre and States had sought to raise the revenues.
However taking the short-term route to raise revenues through rate hikes will be an error.
A higher rate of taxes on inputs and finished products will lead to tax evasion.

The ideal solution would be to keep all input and output rates at 5% while retaining the high-end fabrics at 12%.
This would be inflation-friendly and boost output.
However it would not be that acceptable to governments who are looking for a revenue boost.
Hence a GST of 8% for both input and output will curb prices without hurting production too much.
However this should be a temporary measure and the rate should eventually move to 5 per cent.
Lower and fewer GST rates across and within sectors should be considered the ideal.

Reference