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GST UPDATE

♦IMPLICATIONS OF GST:A DOUBLE EDGED SWORD

→It seems that confusion related to GST will not fizzle out soon as industry players from both the apparel and textile sectors are very often seen raising their concern about GST and the confusion related to it.

In the apparel industry, the Apparel Export Promotion Council has recently asked the Ministry of Finance for the refund of IGST paid on import of machinery used by the apparel manufacturer and exporters. In a letter written to Ministry of Finance, AEPC has said after the implementation of GST from 1st July 2017, apparel exporters are required to pay Integrated Goods and Service Tax (IGST) up to 18% on assessable value plus Basic Custom Duty while clearing shipments of capital goods under Export Programme Grant Scheme. The incidence of a very high Integrated Goods and Service Tax, without any corresponding relaxation for export obligation has rendered the Export Programme Grant Scheme unattractive.

In a missive to the Chairman of the Drawback Committee of Ministry of Finance, AEPC Chairman Ashok G Rajani has highlighted the incongruous situation which has surfaced after the implementation of Goods and Service Tax. The letter states that the only way for apparel exporters to claim IGST refund is through input tax credit but apparel exporters, who import capital goods normally export 100% of their products and do not sell their products in the domestic market. Hence, issue of utilisation of input tax credit (ITC) doesn't arise for these exporters. On the contrary, domestic players who are importing capital goods are better placed as they have various opportunities to utilise input tax credit. He further complained that during the pre-GST regime, apparel exporters were availing the benefit of the EPCG scheme, where exporters were allowed to import capital goods without paying any import duty. This scheme was very popular amongst apparel exporters and encouraged many of them to invest in new units or go for expansion but in the recent policy there has been no clarity on the refund proceeds of IGST. "The working capital requirement of the exporters has gone up drastically due to the high rate of IGST which has not only added to the cost of production but has created a glaring anomaly by making domestic operations attractive compared to exports, " said Rajani. AEPC has informed the ministry that the refund mechanism of input tax credit on account of IGST has become a matter of serious concern. In order to create a positive eco system of investment, expansion, employment and export, it is important that Government intervenes in this matter and provide the best possible assistance to exporters. Not only apparel but the textile sector also has raised serious concerns and is now seeking the refund of the accumulated input tax credit at the fabric stage, citing cost escalation of the value chain. Industry representatives have stated that delay in refund of accumulated input tax credit could lead to increased import of fabrics, resulting in job losses in the highly vulnerable sectors like powerloom, handloom and processing.

The textile industry fears costs could escalate by anywhere between 3 to 5%, which could further impact capacity utilisation. According to the newly elected chairman of the Southern India Mills’ Association (SIMA) and managing director of KPR Group, P Nataraj, this percentage share in cost escalation is proportionate to the range of accumulation of input tax credit on the sales value, especially for sectors like powerloom, handloom and processing.

The industry has appealed to the GST Council to sort out both the anomalies of refunding the accumulated ITC at any stage of manufacturing, especially processed fabrics and also reduce the GST on MMF spun yarn, including filament sewing threads from 18 to 12%.

(Ashok G Rajani, Chairman, AEPC)

(P Nataraj, Chairman, Southern India Mills’ Association (SIMA) and Managing Director, KPR Group,)



'The Indian textiles and clothing industry had gone through continuous recession during the last three years mainly due to poor off-take in the global market; the FTA/PTA competitive advantage gained by competing nations like Vietnam and Bangladesh; and the high tariff rates imposed on Indian textiles and clothing products in the major textile making countries such as the US, the EU, Canada, and China. The total textiles and clothing exports had stagnated at around US$ 40 billion during the last three years,” Nataraj pointed out.'

SIMA and other textile bodies have appealed to the centre to refund the accumulated input tax credit at fabric stage that had been singled out to avoid cost escalation. As per the industry, apart from avoiding cost escalation, a timely refund could also avert high imports of fabrics and fall in capacity utilisation which could result in job losses.

AEPC has said after the implementation of GST from 1st July 2017, apparel exporters are required to pay Integrated Goods and Service Tax (IGST) up to 18% on assessable value plus Basic Custom Duty while clearing shipments of capital goods under Export Programme Grant Scheme. The incidence of a very high Integrated Goods and Service Tax, without any corresponding relaxation for export obligation has rendered the Export Programme Grant Scheme unattractive.

For instance, the weaving industry in Surat which houses 650,000 such powerlooms, saw over 40% shut down over a month, thereby incurring a loss of over Rs 1,200 crore so far. As per SIMA, dyes and chemicals account for over 30% of the processing charge that attract 18% GST, while the fabric or job work is levied with 5% GST. Ashish Gujarati, president of Pandesara Weavers’ Association, which alone has 200,000 powerlooms, said that the only difference has been a slight reduction in accumulated input tax credit from Rs 1.25 per metre to 80 paise per metre under a 5% GST on twisting job work.

The industry is now continuing to press for reduction of GST rate on man-made fibre (MMF) spun yarn, including sewing thread filament yarns from 18% to 12%. The powerloom sector and independent weaving units that produce over 95% of the woven fabric is burdened with 18% GST on yarn, while the vertically integrated units do not have such a problem as they need to pay 18% GST for fibres and only 5% GST on fabrics and the cost difference works out to 5 to 7%. The industry has appealed to the GST Council to sort out both the anomalies of refunding the accumulated ITC at any stage of manufacturing, especially processed fabrics and also reduce the GST on MMF spun yarn, including filament sewing threads from 18 to 12%.

The industry is under severe pressure and most of the players have seen a downfall in business impacting the entire supply chain and profitability.

♦OPPOSITION ARGUES AGAINST GST ON TEXTILE AS "MINDLESS TAX"

At the GST council meet in Hyderabad, the Finance Ministers of Congress ruled constituencies argued that implementation of GST had enfeebled the textile sector and had put the comparatively smaller players in great distress. The party said the losses suffered by the textile sector, in which around 12 crore people are engaged and is the second-largest job provider after agriculture, could notably affect the economic growth of the country unless concerns were addressed effectively. States such as Gujarat, Maharashtra, Punjab and Tamil Nadu are the worstaffected.

Congress Vice-President Rahul Gandhi had gone to textile hub Surat in Gujarat and met shopkeepers, entrepreneurs and representatives of unorganised labour in the textiles, embroidery and jewellery sectors. They told Gandhi about the job losses and the GST’s impact on their livelihood and the leader promised to take up their concerns on the table of the law makers.

The Congress leadership called Punjab Finance Minister Manpreet Badal and his Karnataka counterpart Krishna Byre Gowda to Delhi to highlight the problems caused by GST before the national media. Punjab’s Finance minister said the GST structure on textile violated all three core principles articulated by the Prime Minister - Make in India, employment generation and export promotion and this has created chaos and pandemonium in the sector. Congress leaders further debated the lack of preparations and measures taken by the government before implementation to make it a success; they said most states experienced shortfall in revenue collection because a large number of traders and manufacturers could not file returns on time owing to glitches and resultant extension of deadlines. They cited the example of Punjab having a shortfall of Rs 800 crore last month.

Punjab’s Finance minister said the central government had claimed a total GST collection of close to Rs 92,000 crore for the month of July. These collections camouflage nearly Rs 30,000 to Rs 40,000 crore of likely taxes that were available as transitional credits, but could not be taken because of the glitches in the GST network and the confusion created by the government by issuing misleading statements. They claimed that the total of these credit tax collections would be far less, creating serious doubts both about GDP growth and tax numbers. Gowda, Karnataka's Finance Minister clearly mentioned how the smaller businesses were suffering .The Congress then issued a statement explaining how the textile sector had been affected.

They argued that manmade fibres are nearly 60% of Indian fibre demand. Manmade fiber and yarn, dyeing and printing units and embroidery are being taxed at 18%, while the rate on the end product, i.e. fabric, is only 5%. This is proving to be a death knell for the small and micro non-integrated textile players, while helping only the biggest fish to sustain themselves. The example given was: "If 1 kg of manmade yarn costs Rs 100, an integrated player will sell the yarn to a non-integrated player at Rs 100, which will attract 18% tax.After taking into account this tax and the value addition of Rs 20, the cost of fabric will be Rs 138. Considering the 5% duty on fabric, garment makers, while purchasing fabric, will sustain a cost of Rs 145. Against this, for an integrated player, cost will be much less at Rs 100+20=120+5%=Rs 126."Such a situation was, therefore, a result of mindless imposition of GST. Small manufacturers are at a further loss as they make grey fabric with value addition as little as 10-20% on yarn. Thus, they have to bear irrecoverable tax credits of nearly 12-14%, while big businesses who go for higher value addition in fabrics suffer much less.

The party concluded saying "Those with integrated plants (producing) yarn to apparel suffer no loss as they will be able to recover the entire tax credits. On top of it, while Indian fabric manufacturers will pay such high taxes, imports from China, Bangladesh, Sri Lanka and other countries at 5% will further hit India’s textile sector, making it unprofitable."

Manmade fiber and yarn, dyeing and printing units and embroidery are being taxed at 18 per cent, while the rate on the end product, i.e. fabric, is only 5%. This is proving to be a death knell for the small and micro nonintegrated textile players, while helping only the biggest fish to sustain