GST Hike On Textiles: Ministries Differ As Industry Pushes Back

The government's move to increase goods and service tax on textiles, when input costs are already rising, is facing resistance from the industry. The two ministries involved also differ.

On Nov. 18, the Finance Ministry, based on the recommendations of the 33-member GST Council, decided to impose a flat 12% tax on textile items like manmade fibre and finished goods from Jan. 1, 2022, to correct the inverted duty structure. At present, a 5% tax is levied on the sale value of up to Rs 1,000 per piece.

A uniform tax rate, according to the council, is expected to address anomalies that occur when the tax rate on raw materials is higher than the tax on the finished product. For instance, inputs into the man-made fibre fabric (yarn and fibre) attract a GST of 12-18%, which is higher than 5% on fabrics. That's also called inverted duty structure.

The Confederation of All India Traders said it met with Union Textiles Minister Piyush Goyal, who categorically opposed the revised indirect tax rates. Goyal insisted that “a status quo” be maintained and changes be made only after a consultation with the textile ministry and industry stakeholders, the apex traders’ body which represents eight crore traders and 40,000 trade associations said in a statement.

“Rationalisation of inverted duty structure in GST is much needed but a careful approach is all the more essential,” the CAIT quoted the textile minister as saying during the meeting. Its Secretary General Praveen Khandelwal also plans to approach Finance Minister Nirmala Sitharaman and state finance ministers requesting them to reverse the proposed hike.

BloombergQuint's queries to the ministries of textiles and finance remained unanswered.

Opposing Views

While the proposed hike hasn’t gone down well with many in the industry, even evoking nationwide protests, a few sections think it would be beneficial.

According to the Apparel Export Promotion Council, the 12% GST is a big breather for the MMF textiles (non-cotton) sector. “It will lessen the tax compliance burden and help in releasing the input tax credit residues accumulated on account of the inverted tax structure, saving crucial working capital for small businesses,” its Chairman A Sakthivel told BloombergQuint.

Others, who mostly deal with finished goods, disagree.

“Such a steep GST rate will adversely impact 85% of the industry while trying to ease the problem faced by less than 15% of the industry,” Kumar Rajagopalan, chief executive officer at Retailers’ Association of India, said in an emailed statement. It’s also ill-timed as it will lead to higher garment prices, which will hurt an already dwindling consumption, he said. “The government must reconsider this decision in the larger interest of the industry.”

CAIT National President BC Bhartia demanded immediate withdrawal of the decision, saying higher taxes will block the capital of small traders.

“Are we totally correcting the inverted tax structure? The answer is a big no. In the cotton textile industry, there was no inverted tax structure, so why were such goods brought under the 12% bracket? Even in the manmade textile industry, at the stage of manufacturing garments, there is no inverted tax issue,” Bhartia said. “Without having any understanding of the stages of the textile industry, such a harsh decision will be a regressive step.”

A reasonable solution, according to Retailers’ Association of India, is to impose a flat 5% GST on the entire value chain, which begins from the manufacturing of fibres to yarn, followed by fabric and processing, and then value-addition on finished fabrics. “That way it will resolve the inverted tax structure and also give a fillip to the sector.”

Lobbies such as the Clothing Manufacturers Association of India, Tiruppur Exporters and Manufacturers Association, Federation of Gujarat Weavers Association, Delhi Hindustani Mercantile Association and the Federation of Surat Textile Association have raised similar concerns.

“The market is expected to see a 15-20% price increase in apparel cost in the coming season even without the revised GST rate,” CMAI said in a statement. The industry is facing inflationary headwinds, with prices of raw materials, especially yarn, packing material, raw cotton and freight on an upswing, it said. “Further hike in GST at this time is simply unjustifiable.”

Prices of raw cotton have risen by Rs 130 per kg so far this year compared to the preceding year, according to Tiruppur Exporters and Manufacturers Association.

MP Muthurathinam, president of the Tiruppur association, told BloombergQuint that the hike is “a steep one”, which could force many units to shut down. The lobby has urged the government to reassess its decision at a GST meeting headed by Union Finance Minister Nirmala Sitharaman in New Delhi on Dec. 14.

Tiruppur, in western Tamil Nadu, is known as the knitwear capital of India and is home to 12,500 textile units and employs over 10 lakh people. Their combined turnover stood at around Rs 60,000 crore in FY21, with domestic business accounting for Rs 32,000 crore, Muthurathinam said. “These are small businesses, and they can’t afford to block their working capital for credits.”

The association said it will meet Tamil Nadu chief minister and finance minister on Monday to apprise them of their demands.

What Tax Experts Say

The 7% hike, according to experts, is substantial and would have a mixed effect on textile manufacturers depending on their business model.

In any case, if manufacturers absorb the hike, the cost will eat into their margins; and if they decide to pass on the hike, it will burn a hole in consumers' pocket, according to Bipin Sapra, indirect tax partner at EY India.

“The GST hike will be an additional burden to most textile manufacturers,” he told BloombergQuint over the phone. “For industries where there is inverted duty structure at 5%, the new rate of 12% will increase tax burden and working capital requirements. In some cases, (the hike) will erode their profitability, in the event the prices cannot be raised.”