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Web Exclusive | August 2016

Will GST rate at 12% hit textile industry?

Will the GST hit textile sector? The question is on the lips of all those who have a stake in the textile industry!

ICRA, an Indian independent and professional investment information and credit rating agency, opines that a 12 per cent (lower rate) recommended by the Dr Arvind Subramanian Committee will have a negative impact on the textile sector, especially the cotton value chain, which is currently attracting zero central excise duty (under optional route); unlike the man-made fibre sector, where the fibre attracts excise duty at the manufacturing stage (unlike cotton).

ICRA points out that the most of the cotton based textile players in the value chain operate through the optional route, thereby resulting in lower duties. The key reasons for the same are exemption on cotton and hence the lower Input Credit Tax (ITC) for cotton spinning mills; as a result the cotton yarn manufacturers opt for the optional duty route without claiming ITC and pay zero excise duty.

On the positive side, under GST, textile players which are oriented towards domestic markets will be able to ITC on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets.

The exports will be zero rated under the GST as there will be transparency and availability of full ITC for exporters which is currently being provided by duty drawback schemes. Accordingly the duty-drawback will lose its relevance under GST; however sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures, an ICRA assessment states.

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