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Cover Story | May 2016

Seal of approval elusive GST

GST has struck the stumbling-block. Will it see the light of the day is the question on everyone’s lips! An ITJ exclusive report takes a hard look at the issues and various implications of this much-touted taxation initiative.

GST -- only a few months ago, it was a buzzword. With other pressing political issues and economic concerns, now decision-makers seem to be suffering from a temporary amnesia! The GST debate even has come to a standstill! Despite the Arvind Subramanian-headed panel’s strong recommendation of 17 to 18 per cent GST (Good & Services Tax), and all the hectic run-up to the imminent finalisation of GST, the move to “Make in India by Making One India” in service and goods taxes is still hanging fire. Many feel the way Sunil Kanoria, President, Assocham, does: “Imposition of GST will improve the ease of doing business in the country apart from giving a uniform market to producers, and that GST is a master weapon to push up the country’s GDP by at least 1.5 per cent.” But differences have cropped up, and muddled by politics, has pushed the GST to the back-burner.

For the textile industry, GST is the right, timely remedy, for the textile chain is a complicated one which has invited a number of disputes in relation to the current taxation. Thorny issues including the fabrics versus garment classification, differential taxation for cotton and manmade fibre, and higher tax for composite mills than the powerlooms are plaguing the industry. The GST will be a uniform rate of tax for such disputed items and likely to amicably settle the disputes.

GV Aras, Director, A.T.E. Enterprises Pvt Ltd, feels that the textile value chain is quite complex in nature and government needs to be sensitive to the needs of the industry while applying GST to textile goods. He adds, “In the current scenario there is generally low or zero tax on final product and the current tax rate is 4 to 12 per cent on various textile categories. Due to the lower rates the tax is shifted back to production making the production costs high. This production based taxation will be transformed into consumption based taxation through GST, which is good for the industry.”

GV Aras says, “The biggest advantage of uniform tax through GST will be a level-playing field for all segments in the textile value chain unlike the present taxation situation. This will certainly increase the efficiency in all the segments with segment integration. Goods movement within states will be much easier and efficient now which will be very beneficial as there are many textile hubs across various states and the goods movement today is quite tedious and expensive.” He feels that the proposed 18 per cent tax rate seems quite high. “I would say GST of 12 to 12.5 per cent would be more acceptable to the textile industry. The industry wants GST to be applied to ex-factory price of the goods and not on the MRP of the goods as there are many overheads which get added up in between,” he adds.

“For textile and apparel manufacturing, GST is expected to bring some challenges as well mainly because it is a lightly taxed industry. The first and foremost is rate augmentation effect. Currently, many of the textile products are either exempted or are subjected to low tax rates which ultimately may come to an end with this new regime. The tax rate imposed under GST may not match the lower revenue neutral rates of textile products. If not absorbed by the manufacturers, this may increase price of indigenous textile products which in turn may reduce their demand. This adverse effect can hamper the growth of the industry at least till the time it gets neutralised by the rise in investments and productivity linked with GST implementation.

Also, the cost of input in terms of working capital required may increase for the unorganised component of textile and apparel industry,” say Varun Vaid, Associate Director, and Kanika Abrol, Research Analyst, Wazir Advisors. Vaid and Abrol further added, “While the exact detailing of GST is awaited, there are some speculations that GST may reduce the import price of goods.

Currently, the importer gets SAD refund, while CVD and any other duty is not refunded. Under GST regime CVD and SAD will be replaced by IGST (inter-state GST) and the importer will be eligible for full credit of IGST. If this happens, textile sector which is already facing stiff competition from China and Bangladesh will further lose cost competitiveness. The profit margins on imported goods would increase as GST may allow a larger share of input credit to importers compared to current regulations.”

“Keeping in view this probable but significant impact of implementation of GST on textile industry, there is a need to find alternative ways to maintain sector’s competitiveness at Government as well as industry level. Exemption from GST regime should be provided to weaker segments including ginning, handloom and handicrafts while the rest may be kept in lowest rate of tax. GST can also act as a tool to promote shift of textile industry towards manmade fibre value chain, in line with the global trend. Keeping both cotton and manmade textile products under the same slab in GST is highly desirable to create a fibre neutral business ecosystem. At manufacturing level, this is the high time to focus on technology, skill and productivity. This approach will help the industry to fight back the speculated negative impact of GST through enhanced competitiveness,” said the duo from Wazir Advisors.

Sanjay Vakharia, COO, Spykar Lifestyles, says “Under GST, there will be no difference between goods and services. It tries to eliminate indirect taxes and mitigate cascading or double taxation issues and leads to a common national market, with elimination of state boundaries.”

He added, “The execution of GST in India emerges from the complications of the current tax system of the country. GST targets to minimise the hitches in double taxation: primarily eradicating cascading tax and smoothing the flow and structure to make it more seamless and organised. It will assist in making full input tax credit possible at central and state level. GST would also help to restructure interstate transactions. It will focus on streamlining the taxation methods at different levels across all the states in the country and between the states & central government. Administrative costs would get condensed – would be one of the merits. A level-playing field would be created with a common national market.”

Says Rahul Mehta, President, Clothing Manufacturers Association of India (CMAI) and MD of Creative Casual India Pvt Ltd, “The rate has to be lower – perhaps even lower than the general merit rate, which is reported to be around 12 per cent. The current rate as per government calculations itself is between 8 and 9 per cent, so anything higher would be a major hurdle. As a matter of fact, keeping an attractively low GST rate would meet several objectives of the government – most of the industry becoming tax compliant, making a success of the ‘Make in India’ strategy, and job creation for the masses. In short, I would urge the government not to exempt the industry from GST, but to keep as low as possible rate.”

Speaking on the trouble spots in the implementation of GST, Mehta said, “Again, a lot depends on the final rate determined. the lower the rate, less will be the incentive to remain in the grey market. Greater the rate difference between the organised and unorganised sectors, greater the temptation to remain small and unorganised.”

Will it pose a problem to the implementation of GST? “Frankly, it will take a lot of political courage and economic sagacity to implement GST across the chain. But the only way the implementation will succeed if it is implemented across. Otherwise, it will be a wash out,” added Mehta.

RS Jalan, MD, GHCL, said, “There is a strong air of optimism blowing around which is reinforcing the fact that the yet to be functional. GST will transform India into a uniform market by breaking the current fiscal barrier between states. It will facilitate a uniform tax levied on goods and services across the country. Expectations are rife that passing of this bill will see a climate of improved tax compliance across India. Talking on the textiles sector, the passing of this bill will witness the elimination of any blockage of input taxes caused due to break of input tax credit chain. It will also provide a level playing field to all segments of the textile industry. There will be a reasonable shift in tax burden from production to consumption as GST is being considered as a consumption tax.”

Speaking on GST’s impact on the Indian retail sector, Vakharia of Spykar had this to say: “Looking at the current picture of the India retail sector, the introduction of GST will act as a benefit at different stages of the value chain. To begin with, the procurement of raw materials, movement of goods would become less cumbersome, which opens gates for more suppliers /vendors to merge. Following this, a wider base of distributors would be available as state boundary paperwork will not be a hurdle, resulting to better access and low transportation costs. A favourable environment for a supply chain would reduce in transit inventory, further reducing the working capital requirement. Adding to this, simplified taxes & availability of input tax credits can help fetch better margins. GST will also avoid the red tape and documentation on collection & submission of various forms.”

On impact on price-sensitive T&A industry, Vakharia adds, “To sustain the competitiveness of the Indian T&A industry and help the industry grow and achieve its potential target, it is very important to support this industry by levying a lower rate of GST as currently fabrics do not attract any tax (both Excise and VAT) and ready-made garments attract only VAT.”

The textile value chain is quite complex in nature and government needs to be sensitive to the needs of the industry while applying GST to textile goods.”
- GV Aras
Director, A.T.E. Enterprises

History of GST

Aproposal to introduce a national level Goods and Services Tax (GST) by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07. Introduction of GST is to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. GST system is targeted to be a simple, transparent and efficient system of indirect taxation as has been adopted by over 160 countries around the world.

Kelkar Task Force on implementation of the FRBM Act, 2003 had pointed out that although the indirect tax policy in India has been steadily progressing in the direction of VAT principle since 1986, the existing system of taxation of goods and services still suffers from many problems and had suggested a comprehensive GST based on VAT principle.

Full implementation of GST could raise India’s GDP growth by 0.9 to 1.7 percent, according to the National Council of Applied Economic Research (NCAER). GST, being a destination-based consumption tax based on VAT principle, would also greatly help in removing economic distortions caused by present complex tax structure and will help in development of a common national market.

No taxing system can completely eradicate the effect of cascading, but implementation of GST, to a large extent, will minimise the effect. GST will provide a simple structure to levy, collect and administer the taxes in the country. A proposal to introduce a national level GST by April 1, 2010 was first mooted in the Budget Speech for the financial year 2006-07. A dual GST module for the country has been proposed by the Empowered Committee of State Finance Ministers (EC). This dual GST model has been accepted by the Centre. Under this model, GST have two components viz. the Central GST to be levied and collected by the Centre and the State GST to be levied and collected by the respective States. Central Excise duty, additional excise duty, Service Tax, and additional duty of customs (equivalent to excise), State VAT, entertainment tax, taxes on lotteries, betting and gambling and entry tax (not levied by local bodies) would be subsumed within GST.

In order to take the GST related work further, a Joint Working Group consisting of officers from Central as well as State Government was constituted. The Constitutional Amendment Bill has been prepared and placed on the table of Parliament in December 2014 after obtaining views of the States.

The SPV called GSTN (Network) will be owned by the three stakeholders; the Centre, states and technology partner NSDL, which is expected to provide an interface to all stakeholders, and avoid evasion in indirect taxation systems. GSTN will implement common PAN-based registration, returns filing and payments processing for all States on a shared platform.

Proposed Tax System

World over, GST rates are typically between 15 and 20 per cent. In India, it is likely to be the same. The tax-rate under the proposed GST would come down, but the number of assessees would increase by 5-6 times. It is interesting to note that there are over 40 models of GST currently in force, each with its own peculiarities. GST have two components viz. the Central GST to be levied and collected by the Centre and the State GST to be levied and collected by the respective States.

The best GST systems across the world use a single GST while India has opted for a dual-GST model. Critics claim that CGST, SGST and IGST are nothing but new names for Central Excise/Service Tax, VAT and CST and hence GST brings nothing new to the table.

I would urge the government not to exempt the industry from GST, but to keep the rate as low as possible.”
- Rahul Mehta
President, CMAI, and MD of Creative Casual India

GST will transform India into a uniform market by breaking the current fiscal barrier between states.”
- RS Jalan
Managing Director, GHCL

Looking at the current picture of the India retail sector, the introduction of GST will act as a benefit at different stages of the value chain.”
- Sanjay Vakharia
COO, Spykar Lifestyles

Pros and cons of GST
- Varun Vaid and Kanika Abrol

T he Goods and Services Tax (GST) Bill 2014 proposes a national value added tax to be implemented in India. This new tax regime will replace a number of Central and State taxes with a single tax. The important taxes that may be subsumed are CENVAT and Service Tax at the Central level and State VAT/Sales Tax, Central Sales Tax, and Entry Tax at the state level along with a number of additional or special duties, cesses and surcharges. Such simplification in tax structure will reduce the associated documentation, thus improving ease of doing business. Introduction of GST will also help to settle the issues of double taxation and remove any blockage of input taxes caused due to breaking of input tax credit chain.

Under GST system, exports will become zero rated in true sense. No GST will be imposed on exports of goods and services and GST paid by the exporters on the procurement of goods and services will be refunded. Any manufacturing industry, textiles being a prime example, which is characterised by the inter-state movement of input and final goods is subjected to multiple duties. The implementation of GST will be a positive move for such industries, eliminating the fiscal barriers and associated hassles in inter-state movement. Hence, GST regime is expected to boost manufacturing intended both for exports as well as domestic consumption.

Undoubtedly GST will bring positive effect on the economy in long term. There is an imminent need in the country to set up a strong and flawless tax regime; for which GST is the perfect answer. Indian industry is eagerly awaiting earliest implementation of GST. Adi Godrej, Chairman of Godrej Group, in one of his interviews, said “Even if there are no other reforms, if the next government implements the GST, I firmly believe it will drive our growth to double digits.”

For textile and apparel manufacturing, however, GST is expected to bring some challenges as well mainly because it is a lightly taxed industry. The first and foremost is rate augmentation effect. Currently, many of the textile products are either exempted or are subjected to low tax rates which ultimately may come to an end with this new regime. The tax rate imposed under GST may not match the lower revenue neutral rates of textile products. If not absorbed by the manufacturers, this may increase price of indigenous textile products which in turn may reduce their demand. This adverse effect can hamper the growth of the industry at least till the time it gets neutralized by the rise in investments and productivity linked with GST implementation. Also, the cost of input in terms of working capital required may increase for the unorganized component of textile and apparel industry.

While the exact detailing of GST is awaited, there are some speculations that GST may reduce the import price of goods. Currently, the importer gets SAD refund, while CVD and any other duty is not refunded. Under GST regime CVD and SAD will be replaced by IGST (inter-state GST) and the importer will be eligible for full credit of IGST. If this happens, textile sector which is already facing stiff competition from China and Bangladesh will further loose cost competitiveness. The profit margins on imported goods would increase as GST may allow a larger share of input credit to importers compared to current regulations.

Keeping in view this probable but significant impact of implementation of GST on textile industry, there is a need to find alternative ways to maintain sector’s competitiveness at Government as well as industry level. Exemption from GST regime should be provided to weaker segments including ginning, handloom and handicrafts while the rest may be kept in lowest rate of tax. GST can also act as a tool to promote shift of textile industry towards manmade fiber value chain, in line with the global trend. Keeping both cotton and manmade textile products under the same slab in GST is highly desirable to create a fibre neutral business ecosystem. At manufacturing level, this is the high time to focus on technology, skill and productivity. This approach will help the industry to fight back the speculated negative impact of GST through enhanced competitiveness.

Varun Vaid is Associate Director, and Kanika Abrol is Research Analyst with Wazir Advisor.

Benefits of GST to the retail sector
- By Sanjay Vakharia, COO, Spykar Lifestyles Pvt Ltd

G oods and Services Tax (GST) is a comprehensive tax levied on manufacture, sale and consumption of goods and services at a national level. Under GST, there will be no difference between goods and services. It tries to eliminate indirect taxes and mitigate cascading or double taxation issues and leads to a common national market, with elimination of state boundaries.

The execution of GST in India emerges from the complications of the current tax system of the country. GST targets to minimise the hitches in double taxation: primarily eradicating cascading tax and smoothing the flow and structure to make it more seamless and organised. It will assist in making full input tax credit possible at central and state level. GST would also help to restructure interstate transactions. It will focus on streamlining the taxation methods at different levels across all the states in the country and between the states & central government. Administrative costs would get condensed – would be one of the merits. A level-playing field would be created with a common national market.

It also eases the launch of start-ups and makes business relatively easier. In a long term perspective, this will lead to a rise in the economic growth of the country. Most importantly, it will strengthen relations with multinational companies and aid in increasing Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII). This will further help in faster decision making, which will further strengthen the relationship with the country.

Looking at the current picture of the India retail sector, the introduction of GST will act as a benefit at different stages of the value chain. To begin with, the procurement of raw materials, movement of goods would become less cumbersome, which opens gates for more suppliers /vendors to merge. Following this, a wider base of distributors would be available as state boundary paperwork will not be a hurdle, resulting to better access and low transportation costs. A favourable environment for a supply chain would reduce in transit inventory, further reducing the working capital requirement. Adding to this, simplified taxes & availability of input tax credits can help fetch better margins. GST will also avoid the red tape and documentation on collection & submission of various forms.

A major pain point for the industry -Rentals are one of the main costs of retailing industry and it attracts service tax at 14.5 per cent. Currently, the retailers cannot set off these costs like the other industries. This they feel is an additional cost of operating in this industry which is unfair to them. Under GST, taxes on services would be available for set off against taxes on goods. Thus, the retailers would be positively impacted.

To conclude, the key benefits of the GST will be the aid where the retailers create supply chain methods based on transportation models rather than taxation models.

Impact on price sensitive T&A industry

To sustain the competitiveness of the Indian T&A industry and help the industry grow and achieve its potential target, it is very important to support this industry by levying a lower rate of GST as currently fabrics do not attract any tax (both Excise and VAT) and ready-made garments attract only VAT.

Sanjay Vakharia, COO, Spykar Lifestyles Pvt Ltd has been a pillar of strength for Spykar Jeans since its inception in 1992. With a strategic bent of an opportunist, Vakharia has been instrumental in creating the brand image for Spykar. With an elaborate experience of over two decades and an extensive insight into global trends across markets like USA & UK, coupled with sharp business acumen, Vakharia gave Spykar the required impetus to transform from a laundry grown to a brand that defines- excellence, aspiration and sustainability.

Also his impeccable understanding of the dynamic and ever-changing youth market of the country has always given the brand the edge over his competitors. The journey of Spykar has seen Vakharia understand the product, the audience and how to seamlessly integrate both to give the discerning group their due without compromising on the value ecosystem of Spykar.

Lowest slab of GST sans exemption vital
- M Senthilkumar, Chairman, SIMA
I ndian textile industry, aged over 50,000 years, the second largest employment provider, next only to agriculture (providing direct and indirect jobs to 105 million people) is scattered all over the country and provides jobs to predominantly rural masses and women folks. It accounts for 12 per cent of industrial production, 14 per cent of forex earnings, 4 per cent to GDP and 5 per cent of the global share is currently estimated at $110 billion.

Prime Minister has set a target of achieving $350 billion by 2023 which is possible only when right textile policies and fiscal policies are in place apart from expediting the conclusion of FTAs with various nations, particularly with the European Union.

Over 80 per cent of the textile manufacturing units are in the decentralised sector and scattered throughout the country. Further, the textile industry works on a wafer thin margin of 3 to 6 per cent as against 8 to 12 per cent profit margin in other manufacturing sectors and 20 to 30 per cent margin in the service sectors.

Considering the complex nature, livelihood of over 105 million people of the nation and vulnerability, it is essential to bring the textile industry under the lowest slab of GST without any exemption across the value chain. Even the handloom sector and other segments which enjoy various exemptions could suitably be compensated by refund mechanism through appropriate bodies rather than giving exemption.

Although GST appears to be a fiscal revolution, the seed for the same was sown with the implementation of modified VAT in 1985 during which period, the textile industry was very much a tax paying industry.

Though, the Government was able to pass the 122nd Constitutional Amendment Bill, 2014 (GST Bill) in Lok Sabha, which will eventually pave the way for Goods and Services Tax (GST) in India, currently the GST Bill is awaiting passage in Rajya Sabha.

However, the Government‘s determination to overcome the political hurdles and introduce GST is visible from the steps initiated to implement the same (i.e) framing, placing in the public domain and calling for comments on four reports on key business processes i.e. registration, payment, refunds and returns in GST regime.

India is proposing to implement dual GST where all the transactions of goods and services made for a consideration would attract two levies, i.e., CGST (Central GST) and SGST (State GST). As against the current taxable events such as manufacture, sale, provision of services etc. GST shall be levied on supply, which includes sale, transfer, barter, lease, import, etc. of goods and/or services made for a consideration.

The Revenue Neutral Rate (RNR) as proposed by the Chief Economic Advisor, Arvind Subramanian could be 17-18 per cent. Further, there could be lower rate of 12-14 per cent for concessional goods and higher rate up to 40 per cent for luxury goods (such as luxury cars, tobacco products, etc.).

SIMA has been representing before the Central Government to levy the lowest rate of tax on textiles, since the same has been classified under declared goods of special importance under the Central Sales Tax Act. Being free from the clutches of central levy of Excise from 2004, where most of the mills have even cancelled their registration with the department, adopting the concept of the payment of the duty in the form of GST and following the procedural aspects appear to be an herculean task, which will also increase the cost of the final product though the concept of input tax credit is in-built in the new tax form of taxation.

Over 80 per cent of the textile manufacturing units are in the decentralised sector and scattered throughout the country.”

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