How Will The Gst Bill Affect Cloth Merchants In india?

By Author: Mohit Yadev
Total Articles: 74
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In ICRA’s view, a 12% (lower rate) recommended by the Dr. Arvind Subramanian Committee is likely to have a negative impact on the textile sector, especially the cotton value chain, which is currently attracting zero central excise duty (under optional route); unlike the man-made fibre sector, where the fibre attracts excise duty at the manufacturing stage (unlike cotton). Hence there is an incentive for the downstream players in manmade sector to avail the Input Credit Tax (ITC).
ICRA points out that the most of the cotton based textile players in the value chain operate through the optional route, thereby resulting in lower duties. The key reasons for the same are exemption on cotton and hence the lower ITC for cotton spinning mills; as a result the cotton yarn manufacturers opt for the optional duty route without claiming ITC and pay zero excise duty.
Mr. Anil Gupta, VP, Corporate Sector Ratings, ICRA Ltd said, “With an optional duty structure at the cotton yarn stage itself, the downstream sectors, i.e. weaving, processing and garments also operate under the optional route. This is reflected in the less than ...
... 1% effective excise duty rate applicable to ~480 spinning and weaving companies rated by ICRA, which accounted for ~Rs 57000 crore revenue during FY2015.”
On the positive side, under GST, textile players which are oriented towards domestic markets will be able to ITC on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets.
“With GST on textile, the textile value chain will become more organised as it will make GST non-compliant suppliersuncompetitive vis a vis GST-compliant suppliers, as the buyers won’t be able to take ITC,” he adds.
“Due to the reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry, which currently operates with a fibre mix of cotton: manmade of 60:40; as against a global average of cotton: manmade of 40:60. However, the above impact will be dependent on the final rates which will be applicable to the sector,” he reiterated.
The exports will be zero rated under the GST as there will be transparency and availability of full ITC for exporters which is currently being provided by duty drawback schemes. Accordingly the duty-drawback will lose its relevance under GST; however sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures, an ICRA assessment states.
Know More About GST Return In India.