The government has decided to impose 18 per cent GST on manmade fibre and synthetic yarn. The textile industry has said it is worried as the levy will reduce the margins of firms manufacturing synthetic yarn and could lead to job losses. A section of apparel exporters have expressed fears about the possibility of a shrinkage in their profit margins due to the varied rates of Good and Services Tax (GST) rates set for different segments of the knitwear production chain, creating complexities in a textile cluster .
The 18 per cent service tax will impact a lot. This is a big worry as presently there is no tax on job work. It will mainly affect the small and medium scale exporters engaged in job work activities. There is also a possibility of job losses in the industries manufacturing synthetic fibres.
Confederation of Indian Textiles Industry Chairman J Thulasidharan observed that the 18 per cent GST rate on manmade fibre and synthetic yarn would have inverted duty structure problem as the fabric would attract only 5 per cent GST rate.
Tirupur, a textile hub in southern Tamil Nadu, is worried about the 18 per cent Good and Services Tax (GST) rate fixed for different segments in the production chain. This will put pressure on the working capital of the job working units, forcing them to exit the business eventually and affecting the entire industry.
The product is normally transported from one stage of processing to the other at least five to seven times before getting packed for shipment or for domestic sales. In almost every stage now, 18 per cent GST will be applicable. GST may increase costs by around two-three per cent.
The industry fears that high tax rates will intensify the tough competition it faces from countries like Bangladesh, Vietnam and China by leading to cheaper imports, increase the prices of textiles products and hit the business of domestic manufacturers.
In the current regime, synthetic fabric is being imported at a compounded duty of approximately 26.75 per cent, which includes a 7.5 customs duty, 12.5 per cent countervailing duty and four per cent special additional duty.
As far as domestically manufactured fabrics are concerned, currently taxes are lower and apply only to the yarn, said Narain Aggarwal, chairman, Synthetic and Rayon Textile Export Promotion Council.
Under the GST structure, the government has imposed an 18 per cent tax on domestically manufactured synthetic fibre and yarn, making imported fabric cheaper than domestically manufactured fabric.
As per the new tax structure, synthetic fabric can be imported at a basic rate of customs duty, which is 7.5 per cent plus the five per cent GST rate.
“Synthetic fabric manufacturers are already reeling under the pressure of cheaper imports, mainly from China. As per reports, China has been flushing the market with around Rs 5,000 crore worth synthetic fabric,” Agrawal said.
“Chinese manufacturers, who enjoy roughly 22 different subsidies from the government, produce the fabric much cheaper,” he added.
Indian manufacturers have been taking price cuts in the face of cheaper imports. The new GST structure will further undermine their situation and lead to closure of manufacturing units, fears insiders.
The GST rates for the entire value chain, after considering the input tax credit, will make synthetic fabric costlier by 5-6 per cent, said J Thulasidharan, chairman of the Confederation of Indian Textile Industry.
But the welcoming news in this respect is that the Council in its 16th meeting held on 11th June 2017 fixed the tax rate on job workers in textile, diamond processing, leather, jewellery and printing at 5 per cent, as against the normal 18 per cent GST rate for services. Giving reasons for lowering the tax rates, Finance Minister Arun Jaitley has said that the objective is to maintain equivalence to the existing taxation level.
Thulasidharan welcomed the announcement on revision of GST rates on job work of textile yarn and fabric manufacturing activity from 18 to 5 per cent.
He said the lower tax will provide relief to the textile industry from the extra burden as majority of the work of textile manufacturing is with small and medium enterprises and is carried on through job works especially in the power loom, knitting, processing and garment manufacturing sectors.