Will this Open New Avenues for India in MMF Segment?
When the GST was introduced in 2017, the tax incidence of 18% for man-made fibre was retained (earlier it was 17.5%, including both the excise duty and value-added tax) but it didn’t bridge the gap with the cotton fibre.
The government will roll out a production-linked incentive (PLI) scheme for the labour-intensive textiles and garment sector and correct its historical policy bias towards a cotton-dominated value chain,
as it plans a renewed bid to reclaim India’s export markets after ceding a substantial ground to Bangladesh and Vietnam in recent years.
In a recent interaction with a group of Japanese officials and investors, Textile secretary Ravi Capoor said the “focussed product scheme” will incentivise the production of about 40 items with high export potential and reposition India as a major producer of synthetic fibre-based apparel.
The incentive structure is being worked out. The textiles ministry is also in talks with the finance ministry to correct a crippling indirect tax structure in the man-made textiles segment,
in which goods and services tax rates remain elevated at the raw material stage and the ITC (input tax credit) process takes time, acceding to a long-pending request of the textile industry.
Decisions on GST rates, of course, are taken by the GST Council that comprises both the Centre and states. While the GST on cotton and textiles made of it stands at a uniform 5% across the value chain,
the rate for synthetic fibre is 18%. Man-made filament/spun yarn is taxed at 12% and fabrics 5%. This is despite the fact that man-made textiles make up for as much as 65-70% of global demand and consequently hold immense export potential.
In India, however, cotton textiles account for close to 70% of the market.
Coupled with rigid labour laws and elevated logistics costs, this distortion — caused by policy interventions for decades — has stunted the country’s ability to raise garment exports exponentially.
The government had rolled out a Rs 6,000-crore package to boost garment exports in 2016.
But in the absence of structural reforms to correct the legacy issues, the package met with only very limited success.
After the GST Council’s last meeting in June, finance minister Nirmala Sitharaman had said a decision on the inverted duty structure,
especially in the textiles, footwear and fertiliser sectors, was deferred but the issue was still being examined by the Council.
Capoor also told the investors that the government would incentivise textiles machinery output under the Aatmanirbhar initiative.
India meets over 70% of its annual demand through imports — which stand at about $2 billion — from countries, including Germany, China and Italy.
To tackle the problem of a lack of scale, the government would facilitate the setting up of mega integrated textile parks near ports.
The major policy interventions are being planned at a time when the Covid-19 pandemic has accentuated a slowdown in exports.
Textile and garment exports shrank 8.6% year on year to $33.7 billion in FY20 and saw a more dramatic, Covid-induced contraction of almost 72% during in the first two months of this fiscal.
“The textiles ministry is also in talks with the finance ministry to correct a crippling indirect tax structure in the man-made textiles segment, in which goods and services tax rates remain elevated at the raw material stage and the ITC (input tax credit) process takes time, acceding to a long-pending request of the textile industry.”
As such, the sector’s share in the overall merchandise exports has been sliding consistently in recent years, having dropped from as much as 13.7% in FY16 to just 10.8% last fiscal, the lowest in around a decade.
Globally, while China remains the most dominant player by a wide margin in both textiles and garments, India has been beaten by both Bangladesh and Vietnam in recent years in apparel exports.
What the country needs is a fibre-neutral tax regime. While a refund in case of an inverted duty structure is permitted under the GST regime, the process takes time, effectively blocking the working capital of companies for months.
While a parity in the tax structure for cotton and man-made textiles has long been sought, industry executives are more optimistic about the structural change now,
emboldened by the fact that the Budget for 2020-21 took a big step by ending an anti-dumping duty on purified terephthalic acid (PTA), which is used for making polyester staple fibre, filament yarn and film.
