GST UP­DATE

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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 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.

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.

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. 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 tex­tile in­dus­try fears costs could es­ca­late by any­where be­tween 3 to 5%, which could fur­ther im­pact ca­pac­ity util­i­sa­tion.

Ashok G Ra­jani, Chair­man, AEPC

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

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