Indian textile industry faces order cancellations due to payment rule

20 Mar '24

3 min read

Pic: Adobe Stock

Insights

Indian textile industry is grappling with order cancellations for garments and fabric due to the new Section 43b(h) of the Income Tax Act.
This has led to substantial financial losses and operational challenges, with businesses across regions like Punjab and Varanasi facing downturns.
The industry is under pressure and MSMEs are operating below capacity.

The Indian textile industry is facing a critical issue with the cancellation of domestic orders for garments and fabric due to the implementation of Section 43b(h) of the Income Tax Act, which mandates payments to micro, small and medium enterprises (MSMEs) in a span of 45 days. The cancellation and return of sold garments and fabric may continue to rise until the end of the current fiscal 2023-24 on March 31.

Industry experts have stated that the section concerning payments to micro and small enterprises has proved detrimental to trade and industry activities across the entire textile value chain over the last one and a half months of the current fiscal.

The Punjab Dyers Association (PDA) has stated that businesses are bound to face significant losses due to the cancellation of garment and fabric orders from buyers. The reverse trend in the market is putting tremendous pressure on the entire textile value chain. The PDA mentioned that dyeing units are also experiencing a slowdown in demand from the downstream industry.

Traders from Varanasi, Uttar Pradesh, have estimated that order cancellations amounted to around ₹250 crore (~$30.1 million) in the local market in the last month alone. The cancellation of orders for sarees and garments is estimated at ₹150 crore (~$18.1 million). In the Varanasi region, traders and manufacturers have faced cancellations of orders for yarn and embroidery materials. According to a local trader, there was a slowdown in new orders after February 15 due to the new payment rule.

In Gujarat's Surat region, which supplies various types of garments across the country, the textile hub is experiencing a reverse trend of order cancellation. Ashish Gujarati, vice president of the Southern Gujarat Chamber of Commerce & Industry (SGCCI), told Fibre2Fashion, "The MSME textile entrepreneurs are facing a significant problem with order cancellations and goods returns. This is causing a crunch in working capital. The MSME units are operating at only 60 per cent production capacity. Most of the cancelled orders were for garments and fabric, with suppliers facing cancellations mainly from the domestic market."

Trade sources mentioned that the government did not respond to demands to postpone the payment rule for one year. It is now clear that Section 43b(h) will come into effect from the coming assessment year 2024-25 (FY 2023-24), which begins on April 1. Buyers are apprehensive about the income tax implications of the new payment rule. If their payments to registered micro and small businesses are delayed beyond 45 days, the outstandings of the current fiscal 2023-24 will not be considered as their expenditures.

Fibre2Fashion News Desk (KUL)

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