On a positive side, GST could be a timely solution by bringing uniformity and a level-playing field for textile players in all segments of the industry. (Reuters)

India’s textile industry is not only several centuries old, but has also been one of the largest contributors to the country’s exports (around 11%) and provided employment to millions.

Indirect taxes, being transaction-based, play an important role in the growth of any industry. The government has so far incentivised the textile industry through various optional exemption and incentive schemes, lower tax rate and the latest being the R6,000-crore textile booster package in June this year, which has increased the duty drawback significantly.

At present, we are on the verge of witnessing the implementation of the most awaited indirect tax reform in India, the GST, expected to be a growth stimulator. But whether this growth stimulator will support the booming textile industry in India or will it take it to a new low?

Some positives to begin with…

On a positive side, GST could be a timely solution by bringing uniformity and a level-playing field for textile players in all segments of the industry. The industry is plagued with several issues including classification disputes (fabric versus garment), differential taxation of cotton and man-made fibre, higher rate for composite mills than power looms, and so on.

Considering the textile industry is tilted towards domestic market—with the industry coming under the GST net—domestic textile players would be able to take full credit of input tax as their sales would be liable to GST. This will reduce the cost of capital investment and encourage domestic textile players. The new tax regime should positively influence exporters, as exports would be zero-rated and input tax credit would be fully available to textile exporters, though increasing working capital requirements in the interim. But the applicable duty drawback scheme at high rates will have no relevance under GST; this could be a dampener.

GST would undoubtedly make the textile industry more organised and regulated, thus compelling non-compliant textile players to become GST-compliant to ensure free flow of credit and competitiveness in the market.

…but negatives weigh higher

On the negative side, the proposed GST rate of 12% (lower rate of GST as per the Chief Economic Advisor’s report) is likely to have a negative impact on the textile industry, the worst being the cotton value chain which is currently leviable to zero excise duty under the optional scheme.

The textile industry is a beneficiary of several exemptions (for instance, central excise and VAT exemption) through the value chain, thereby reducing the tax incidence to an average rate of 8.9%. Additionally, the current rate of tax on branded apparels is much lower than the proposed 12% GST.

The industry is one of the most price-sensitive industries and such a high and sudden increase in the tax rate would severely reduce competitiveness in the domestic market on account of working capital blockage and expensive final product. The timing of the booster package is, therefore, crucial for the future of this sector, which has not seen investments for years.

It is important for the government and the GST Council—which will be formed sometime in September—to have a focused approach towards certain sectors like textile, which contributes significantly to the economy. The GST Council should be careful while imposing the rate of 12% on this industry and come up with a specific implementation plan of lower/standard rate of GST in a phased manner. It is important for this industry to have enough breathing time to cope with higher tax rate. While under GST the concept of outright exemption is unlikely, in order to ensure profitability and sustainable growth path for the industry, the government could consider increasing specific subsidies beyond the current plan. This would ensure the government continues to move ahead to reform this sector, though GST may be seen as a step back.

While GST is considered to be the new and refined way of life in the indirect tax space, specific considerations and concerns have to be addressed to ensure sustainability and competitiveness of the textile industry, and to facilitate this industry to reach its potential.

—Kunal Wadhwa

The author is partner, Indirect Tax, PwC India