Consulting firm Wazir Advisors hasconducted a detailed study on the impact on selling price and taxes paid to thegovernment before and after GST. Sumit Parmar of Wazir looks at the completetextile value chain and finds that GST has failed to resolve the issue ofdifferential duty structure in the industry as well as the issue of fibreneutrality.
The Goods & Services Tax (GST)rolled out on July 1, 2017 heralding a new era of economic reforms in thecountry. GST subsumed all the central as well as state taxes, and brought thecountry under one single regime, thus replacing the complex multiple indirecttax structure. This reform is intended to transform India into a single marketfor manufacturing and selling of goods, bring in greater tax compliance and efficientresource allocation which in turn will help in improving manufacturingproductivity.
GST has now replaced central taxesand duties such as excise duty, service tax, counter vailing duty (CVD),special additional duty of customs (SAD), central charges and cesses and localstate taxes, i.e., value added tax (VAT), central sales tax (CST), octroi,entry tax, purchase tax, luxury tax, state cesses and surcharges andentertainment tax (other than the tax levied by the local bodies). GST is adestination-based tax structure, and it is levied only at the consumptionpoint. Under this structure, a merchant has to pay tax only on the valueaddition of its product and allows manufacturers and retailers to reclaim inputtax credit paid during the purchase of raw material, thus setting off theindirect tax. This feature eliminates the cascading effect of taxes which usedto trickle down to the end consumers. The GST council has approved five baserates i.e. 0 per cent, 5 per cent, 12 per cent, 18 per cent and 28 per cent ondifferent goods and services.
GST andthe textiles industry
Under the new GST regime, textilecommodities will fall under the 0-18 per cent tax cloud. Table 1 illustratesthe change in the tax structure at different segments in the textiles industry.
Table 1:Tax Structure in Textile Value Chain
On comparison between the two dutystructures, the cotton value chain which was exempt of any excise duty(exclusive of VAT/CST) will now have to pay a minimum of 5 per cent duty acrossdifferent segments. While in case of MMF value chain, which was earlier paying12.5 per cent excise duty on fibre and yarn level (exclusive of VAT/CST) willnow pay now pay 18 per cent GST for the same. This indicates that the textilesindustry will be paying higher taxes overall.
The textiles industry faces a
unique issue in the presence of a differential duty structure both in different
fibre value chains and within specific value chains too. This situation was
prevalent in the earlier tax regime and is still relevant for the new GST
regime. The result of such a structure is the accumulation of duty at a certain
point in the value chain wherein the duty paid on the input is higher while the
duty on the output is comparatively lower. This accumulated duty is embedded in
the cost of the final product by the seller as he/she is unable to set off the
input duty which in turn leads to higher prices.
Now, with the onset of higher
duties, the quantum of duty accumulation will increase which will lead to
further increase of prices. To analyse these implications, four basic value
chains have been considered which encompasses the majority of textiles
production in India:
a) 100 per cent cotton value
chain;
b) MMF rich blended value chain -
PC (65/35);
c) Cotton rich blended value chain
- PC (48/52);
d) 100 per cent MMF value chain -
PV (50/50).
Implications
on 100 per cent cotton value chain
Cotton textile value chain
attracts a singular rate of 5 per cent across the value chain except on cotton
garments with retail value of more than? 1,000 per piece. Due to a constant
duty rate being charged on subsequent products (with higher value addition)
across the value chain, there will be no duty accumulation. At each stage of
this chain, manufacturer will be able to avail input credit on the purchase of
raw material and will only pay duty for the value addition.
Due to the balanced tax structure,
prices of intermediate products (i.e. fibre, yarn and fabric) are not expected
to increase. However, on the retail end of the chain, prices of cotton garments
(value more than ? 1,000) will rise due to higher duty paid by the retailer.
Table 2:
Scenario for 100% Cotton Value Chain
Table 2 represents duty flow in a
100 per cent cotton value chain, taking 1kg of cotton fibre and further converting
it into subsequent products. At retail level, retailers keeping price points above?
1,000 per garment will have to pay approximately 4 times higher net duty to
government as compared to garments sold at price points below? 1,000.
This will lead to the following
two scenarios:
a) Dip in prices of low cost
garments below? 1,000 per garment so that they are subjected to 5 per cent
rate;
b) Increase in prices of high cost
garments above? 1,000 per garment as they will attract significantly higher
duty rate of 12 per cent.
Implications
on MMF rich blended value chain
This situation is particularly
complex for 100 per cent MMF and MMF blended value chain as there is
significant variation in the tax rates at fibres/yarn (18 per cent) and fabric
level (5 per cent). This duty differential will create a higher tax incidence
on fibre and yarn level than on the successive value chain segment i.e. fabric
which will lead to duty accumulation at the weaving stage.
Table 3:
Scenario for MMF Rich Blended Value Chain
Table 3 represents duty flow in
polyester cotton (65/35). The applicable duty at finished fabric level is
smaller than the cumulative duty paid on the input raw materials i.e. fibre and
yarn, resulting in a net negative duty. This means that weaver will not be able
to reclaim full input credit on purchase of yarn, and hence the weaver will
increase the price of fabric in order to mitigate the loss. This increase in
fabric prices will further reflect in the increased prices of MMF blended
garments.
Implications
on cotton rich blended value chain
The duty structure under this
chain will be such that duty accumulation will occur at both yarn and fabric
stage. As mentioned earlier, a cotton rich value chain will attract 5 per cent
duty rates at all levels (i.e. fibre, yarn, fabric, etc). However, due to
addition of MMF at the fibre stage, the net duty at that level will become
greater than at the subsequent yarn stage which will trickle down to fabric as
well.
Table 4:
Scenario for Cotton Rich Blended Value Chain
This situation will result in
blended yarn manufacturers keeping the MMF component on the higher side in the
blend composition as compared to the cotton component in order to avoid duty
accumulation at this stage. This might also result in an increase in both yarn
and fabric prices to offset the accumulated duty loss.
Implications
on 100 per cent MMF value chain
A 100 per cent MMF value chain
will face the implication as that of MMF rich value chain, wherein there will
be a duty accumulation at the fabric stage.
Table 5:
Scenario for 100% MMF Value Chain
To set off the higher duty paid on
raw material i.e. yarn, weavers will increase the prices of fabric which will
further result in increased garment prices.
Conclusion
As per its defined objectives, GST
will have a positive influence on the textiles industry in terms of eliminating
distortions in the tax system, reducing compliance for industry, facilitation
of input tax credit etc. However, GST has failed to resolve the issue of
differential duty structure in the industry as well as the issue of fibre
neutrality. Duty accumulation was an issue for the MMF industry earlier also,
however, with the increase in the duty rates, it will become more prominent and
it will lead to a likely increase in the prices of finished goods.
About
author:
Sumit Parmar is a research associate at Wasir Advisors. He has completed his BTech in textile technology from Technological Institute of Textile & Science, Bhiwani in Haryana.
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