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,