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Cover Story | November 2017

Exports Face a Drawback!

Misfortunes have come in battalions for textile exporters – firstly GST dilemma, then, hardening of rupee and now the axe on duty drawback rates. An exclusive ITJ Report throws some light on the issue.

Chips are down for the textile exporters now! After having felt the pinch of a stronger rupee in the last few months compounded by jitters over GST, the exporters are facing a heavily axed duty drawback rates – from about 7 per cent to 2 per cent! The drawback rate announced for garments is 2 per cent as against 7.7 pr cent earlier. In the case of made-ups, it was 7.3 per cent and has been reduced to 2 per cent now.

Says Rahul Mehta, President of Clothing Manufacturers Association of India (CMAI): “In the case of garments, the duty drawback system has been working well so far. But the Government has reduced duty drawback rates steeply with effect from October 1, 2017 in the context of introduction of GST and this have practically rendered our garment exports uncompetitive in the global markets.”

According to Dr Siddhartha Rajagopal, Executive Director, Cotton Textiles Export Promotion Council (Texprocil): “Under GST, exporters are allowed to take refund of the Input Tax Credit on the export goods. However, these refund are limited only to the extent of GST paid on inputs. Therefore, the lower rate of duty drawback along with input tax credits are not giving enough incentive and encouragement to export. In fact, cotton textiles export products have become uncompetitive against products from competing countries like Bangladesh, Pakistan, Vietnam, Sri Lanka, etc. on account of lower drawback rates.”

P Nataraj, Chairman of the Southern India Mills’ Association (SIMA), has appealed to the Ministry of Finance to have a re-look at the drawback rates applicable for textiles, refund all the blocked, embedded taxes, levies and accumulated input tax credit on fabric especially the processed fabric. He has stated that the cost of dyes and chemicals accounts 30 to 40 per cent of the processing charges. Dyes and chemicals attract 18 or 28 per cent GST making 3 to 5 per cent accumulation of input tax credit as the fabric or processing job work attracts only 5 per cent GST. He added that the service tax has been increased 15 to 18 per cent and several services have been brought under tax net under GST.

SIMA chief has felt that at yarn stage the actual drawback rate would work out to 2 to 2.5 per cent and at grey fabric stage, the same would work out around 3 per cent while at finished fabric, garments and made-ups would work out to more than 5 per cent. The exports will suffer very seriously and dwindle down sharply. Nataraj has stated that the Government must ensure that no taxes are exported so that the exports will be competitive.

In order to protect the jobs of several millions of people in the textile industry, he has urged the Government to extend the existing drawback benefits till the GST anomalies and problems are fully sorted out and also the realistic drawback rates refunding all blocked, embedded taxes and levies including accumulated input tax credit at fabric stage are fully taken into consideration.

Commenting on the issue, Ashok G Rajani, Chairman, Apparel Export Promotion Council (AEPC), said, “The apparel industry needs to book orders in advance for the next season. The uncertainty prevailing for the last three months regarding the GST rates on apparel and job work have already cost the industry’s order books. “I think the present new rates are unacceptable and the Ministry of Textiles should immediately consider AEPC’s recommendation for extending the current transition rates till March 31, 2018, to instil confidence in the sector and also ensure a smooth transition into GST and also for sustaining the employment in the sector. In the absence of an encouraging drawback rates, the exports will further witness a sharp decline just ahead of the peak festival season when the industry was expecting recovery.”

Narain Aggarwal, Chairman of the Synthetic & Rayon Textiles Export Promotion Council (SRTEPC), observed that the roll out of GST had brought about a lot of mixed reaction in the textile industry with the MMF industry bearing the maximum burden with high rates for raw materials of MMF than other fibres. Post implementation of the GST regime, there has been an overall blockage of working capital across the textile industry. The 18 per cent GST on spun, textured, fully drawn, warp and knit yarns and 5 per cent GST on fabrics with no input tax credit refund mechanism have created huge accumulation of unutilised input tax credit. This has left the huge embedded tax of 13 per cent (18 per cent - 5 per cent = 13 per cent), which needs to be compensated to exporters with at least 5 per cent duty drawback.

Expressing disappointment at the announcement of the new duty drawback rates, Aggarwal informed that Government is well aware about the prevailing conditions in the textile industry that had been in the negative territory for more than previous two years and hence should have shown some more positive gesture by increasing the drawback rates. Aggarwal informs that current global competition is neck to neck and business margins in textiles are the thinnest than ever. “If Government does not support the exporters letting them receive refund of the various un-rebated duties paid by them by way of compensating drawback rates, then exports are likely to fall further and more than 30 per cent of textile manufacturing units will be closed. This will create both employment and foreign exchange crisis in the country,” he adds.

Aggarwal pointed out that there are still various taxes not adjusted with GST such as transmission charges, electricity duty, cross subsidy on electricity bills, water cess, green tax, local body taxes, road taxes, labour cess, etc. Average percentage of such blocked un-rebated State input taxes and duties is more than 5 per cent of FOB value of the textiles exported which should be compensated with revision of the duty drawback rates upwards to at least 5 per cent for fabrics and made ups and this will certainly help is generation of more employment, growth in production and exports and foreign exchange earnings. He also stated that as per the WTO rules, no country should export taxes and the duty drawback is the WTO compatible mechanism for refund of taxes and duties paid by the exporters.

Aggarwal also spoke about the critical issue of huge import of fabrics from China, especially in the post GST regime. He said that the import of most MMF particularly fabrics have become 13 to 14 per cent cheaper in real terms which he felt could result in closure of over 50 per cent of fabrics manufacturing units in textile hubs like Surat, Malegaon, Bhiwandi, Ichalkaranji, etc. He further added that no specific duties are imposed on the fabrics falling under Chapter 60 and hence, the imports of fabric from China are taking place under Chapter 60. He further stated that all other fabrics falling under other chapters attract specific duties. He requested the Government to impose a specific duty or an additional duty of 15 per cent on imports of fabrics.

There is 7 to 8 per cent month-on-month drop in ready-made garment exporters and the main reason cited is appreciation of rupee against the dollar. When exports are already under stress and when the industry is not clear on the input tax credit that would be available, the industry should be supported, added Prabhu Dhamodaran, Secretary of the Indian Texpreneurs Federation.

Commenting on the likely release of the held-up refund of IGST paid on goods exported in July from October 10, 2017 onwards, Ronak Rughani, Vice Chairman, SRTEPC, informed that this will be big relief for exporters especially for the merchant exporters, who have put in huge working capital during past two months. The August backlog would get cleared from October 18, 2017 and refunds for subsequent months would be dispersed expeditiously. Release of the held-up fund paid on inputs will be ploughed back by the exporters again into exports, and this is likely to boost export momentum in the coming quarters, he added.

Chairman, SRTEPC also informed that the Government has recognised the significant contribution that the merchant exporters have been giving in national trade and hence consequently announced that merchant exporters will now have to pay nominal GST of 0.1 per cent for procuring goods from domestic suppliers for export.

GST relief for MMF

However, in another important move by the Modi-led Government, GST cut on man-made fibre (MMF) has come as a welcome relief to the otherwise-ailing industry. MMF was slotted under 18 per cent GST rate while the fabrics were slotted under 5 per cent GST slab with a condition that no refund of Input Tax Credit would be allowed at fabric stage. This was creating a huge inverted duty problem for the synthetic sector and inflating the cost of synthetic products that already had serious threat by cheaper imports. Under the post-GST regime, with the abolition of 12.5 per cent countervailing duty and 4 per cent special additional duty, the import has become cheaper. The industry has been pleading the GST Council to reduce MMF yarn GST rate from 18 to 12 per cent to avoid the cost escalation of yarn and facilitate the power loom sector to remain competitive.

SIMA Chairman also has thanked the GST Council for giving a relief for the blockage in credit of exporters that affects the cash liquidity of the exporters. He has hailed the announcement of processing the refund cheques for July exports by October 10 and August exports by October 18 and also the decision for refunding a notional amount for the remaining months and later adjust the amount in the e-qallet while implemented from April 1, 2018. He stated that this would resolve the problem of working capital blockage and benefit the exporters.

He has added that the suspension of reverse charge mechanism till March 31, 2018 will benefit small businesses and substantially reduce compliance costs.

He has welcomed the announcement of easing the compliance burden of medium and small taxpayers and increasing the eligibility of composition scheme from Rs 75 lakh to Rs 1 crore. Extending the tax exemption for 100 per cent EOU units, Advance Licensing Scheme and EPCG Scheme and also for the merchant exporters with 0.1 per cent tax payment up to March 31, 2018 are few more announcements that benefit the textile industry says, Nataraj.

Commenting on the move, Rajani of AEPC, said, “The changes which have been announced by GST Council after its meeting will give a great relief to the apparel industry for the immediate term, as the sector has been facing severe liquidity crunch after the introduction of GST. AEPC would like to thank the various Government Departments which have been working closely with all the stakeholders for considering the plea of its members and reducing the rate of various man made raw material items. However, since the duty structure remains inverted with fabric at 5 per cent GST, we are hopeful that the embedded taxes arising out of this inverted structure will be refunded to exporters through appropriate mechanisms.”

Commenting on ROSL scheme, Aggarwal stated that he thanks the Union Minister of Textiles for introducing the ROSL Scheme, the much needed initiative for the first time, for rebating the substantial amount of State levies being paid by the exporters while manufacturing the exportable textiles. The ROSL scheme rebates the state levies such as state VAT/CST on inputs including packaging, fuel, duty on electricity generation and duties and charges on purchase of grid power. Currently, this scheme is available only for garments and made ups.

Duty drawback cut, a huge blow to exports

- Rahul Mehta, President of Clothing Manufacturers Association of India (CMAI)

Duty drawback on exports cover domestic duties and charges borne by exported goods since importers or consumers abroad are not required to pay these charges. Excise duty, customs duty and service charges are the major elements taken into account for deciding the duty drawback rates, but other duties and charges are also covered. Exporters are refunded these charges so that they do not have to pass them over to importers abroad. With introduction of Goods and Services Tax (GST), which is refunded to exporters, the duties and charges subsumed by GST have gone out of the drawback system.

In the case of garments, the duty drawback system has been working well so far. But the Government has reduced duty drawback rates steeply with effect from October 1, 2017 in the context of introduction of GST and this has practically rendered our garment exports uncompetitive in the global markets. With the slowdown in global economy for nearly 10 years now, our garment exports have already been facing tough times and the substantial appreciation of rupee in recent months has aggravated the situation further. The huge reduction in duty drawback rates has dealt another severe blow to exports. The table highlight the extent of reduction being effected in the rates.

The rate for Return of State Levies (ROSL) is also being reduced to 0.7 per cent from October 1 from the current rate of 2.9-3.9 per cent of FOB value. Duty drawback rates have been reduced taking into account the return of GST to exporters. But such return of GST has not yet started, though GST is being levied from July 1, 2017. It is also not clear as of now as to when the return of GST to exporters will actually commence.

In this backdrop, government needs to immediately initiate the following steps to ensure that our garment exports do not collapse, taking with it the targets of job creation, since garment making is the most labour intensive industry in the country:

  • The current rates of DBK, including ROSL, should be continued up to March 2018 and any reduction should be effected only from the next fiscal.
  • Taking into account GST rates, the domestic duties not subsumed under GST and the customs duties applicable on various inputs, the proposed new DBK rates including ROSL should be revised upwards.
  • Cotton exports becoming uncompetitive

    - Dr Siddhartha Rajagopal, ED, Texprocil

    The Ministry of Finance has announced revised all industry of rates of duty drawback vide Notification No. 88/2017-CUSTOMS (N.T) dated September 21, 2017 . The new rates for Cotton textiles are less than 2 per cent. The revised rates, which are effective from October 1, 2017, are limited only to the incidence of duties of customs on inputs used and remnant Central Excise Duty on specified petroleum products used in the generation of captive power for manufacture of export products. Consequently, the drawback rates are very low as compared to the rates which existed prior to September 30, 2017. This will have a serious impact on exports especially in the context of the inordinate delay in the refund of GST on exports.

    Exporters of cotton textiles were getting duty drawback rates varying from 3 per cent to 4.7 per cent on cotton yarn, 4.3 to 5.1 per cent on cotton fabrics and 7.5 per cent on cotton made ups. These rates were provided when there was 6 per cent optional central excise duty on cotton textiles and most of the textiles units had opted for zero duty. In other words, exporters were getting these rates despite the fact that the excise duty paid by them on inputs were zero in majority of the cases. As against these rates, the current drawback rates are less than 2 per cent.

    Under GST, exporters are allowed to take refund of the input tax credit on the export goods. However, these refund are limited only to the extent of GST paid on inputs. Therefore, the lower rate of duty drawback along with input tax credits are not giving enough incentive and encouragement to export. In fact, cotton textiles export products have become un-competitive against products from competing countries like Bangladesh, Pakistan, Vietnam, Sri Lanka, etc. on account of lower drawback rates.

    There is a need to increase the duty drawback rates for different categories of cotton yarn, fabrics and made ups under GST as there are many taxes that remain embedded, when these products are exported. Under GST, no input tax credits are available for the following taxes:

    • Petroleum taxes, Electricity duties and Stamp duties and Registration fees, which are not subsumed under GST
    • Construction inputs for which credits are explicitly disallowed, and
    • GST payable on inputs of the farming, petroleum, electricity and Real estate sectors which will remain exempted under the scheme.

    The total quantum of taxes embedded in the cost of textile and apparel exports is estimated at 5.35 per cent for the central taxes and 4.05 per cent for the State taxes, for a total of 9.40 per cent of FOB value of exports. The Council has represented to the Government for suitable increase in the duty drawback rates by including embedded Central taxes.

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