In the diverse and layered textile industry – spanning raw materials, spinning, weaving, processing, and garmenting, the pricing and taxation of goods involves several incidental charges. These include freight, packing, loading/unloading, insurance, and handling costs, which are often integral to the movement and sale of textile goods.
In the GST regime, businesses in the textile sector must understand how these ancillary expenses impact the value of supply, the basis on which GST is calculated. This article explores how such charges are treated under GST, with scenarios relevant to the textile supply chain.
Understanding Section 15 of the CGST Act, 2017
Section 15 of the Central Goods and Services Tax (CGST) Act, 2017, provides that the transaction value is the price actually paid or payable for the supply of goods or services, provided the supplier and recipient are not related and price is the sole consideration.
Importantly, Section 15(2) mandates that the value of supply must include:
(b) Any amount the supplier is liable to pay in relation to a supply but is incurred by the recipient.
(c) Incidental expenses such as packing, commission, or freight, charged by the supplier.
(d) Any amount charged for anything done by the supplier at or before delivery.
These provisions have become particularly significant for textile businesses where cost heads like freight and packing are frequent. Let us analyze as to
1. Freight and Delivery Charges – Paid by Supplier and Recovered from Customer
In the textile industry, it is common for suppliers (e.g., spinners, fabric manufacturers, garment exporters) to arrange door delivery for their customers. In such cases, the freight charges are either:
- Recovered at cost, or
- Billed with a markup.
Whether separately shown in the invoice or bundled in the price, the GST law treats these as a composite supply. The entire value (goods + freight) attracts GST at the rate applicable to the textile goods (e.g., 5% for cotton yarn, 12% for synthetic fabrics).
Example:
A yarn manufacturer in Coimbatore supplies yarn to a garment unit in Ludhiana. The invoice reads:
- Yarn (1000 kgs) @ ₹200/kg = ₹2,00,000
- Freight = ₹10,000
- Total = ₹2,10,000
In this case, GST is applicable for 2,10,000 as the freight is incidental to supply.
2. Supplier’s Obligation Paid by Recipient – Section 15(2)(b)
Sometimes, textile buyers directly arrange transport even when the supplier was contractually obligated to deliver. This commonly occurs in “delivery at site” contracts where the supplier agrees to deliver but the buyer pays the transporter.
Under Section 15(2)(b), such charges, although not paid by the supplier, must be added to the value of supply, as they represent a supplier’s liability met by the recipient. If not included, it can lead to under-reporting of GST liability.
Illustration:
A fabric mill sells fabric at ₹5 lakh, with a contract to deliver goods. The buyer arranges a truck and pays ₹20,000 freight. The mill invoices are only 5 lakhs. Legally, the freight cost must be added to the transaction value, and GST should be calculated at 5.2 lakhs.
3. Buyer Pays for Freight – Not Supplier’s Obligation
If the contract is ex-factory or FOB (Free on Board) and the buyer independently engages and pays the transporter, then the freight is not part of the value of supply.
In this case:
- GST is charged only on the value of goods.
- Freight is a separate service billed by the transporter (a Goods Transport Agency or GTA).
- Reverse charge may apply if the recipient is a registered business.
Generally, Export-oriented textile units importing raw cotton from spinning mills or synthetic yarn from other states, where freight is booked independently.
4. Freight Charges – RCM Applicability & ITC thereof
Under Notification No. 13/2017-Central Tax (Rate), services provided by a GTA (not any transporter) to specified categories of persons (including registered textile manufacturers and exporters) are taxable under Reverse Charge Mechanism (RCM) at 5% without ITC to the GTA, or 12% with ITC if voluntarily opted under forward charge by the GTA (as per Notification No. 20/2017). RCM is applicable when:
- GTA does not charge GST (i.e., opt for RCM).
- The recipient is a registered entity, including textile mills, fabric processors, and garment manufacturers.
Issues under GTA Transactions –
a) Classification of the Transporter as GTA – Disputes arise where suppliers or buyers claim the transporter is not a GTA, but merely a lorry owner. Authorities insist RCM applies even to single lorry owners if a consignment note is issued. Small-scale suppliers in yarn and grey fabric sectors often engage transporters informally without consignment notes, but the department may argue RCM applies based on freight recovery.
b) Embedded Freight in Supply Contracts – In cases where freight is embedded in the product price but not separately shown, whether it is liable to RCM becomes controversial.
For example – Yarn supplier invoices “FOR Delivery” but includes freight silently in the goods’ rate. Departments often argue that the transporter was hired, hence RCM is applicable, regardless of the bundled rate.
How do we solve that? Use of explicit contractual language stating whether freight is absorbed or separately recoverable. If included in price, classify freight as composite supply and pay GST at product rate (forward charge). Avoid double taxation via RCM.
c) RCM Liability on Third-party Freight Recovery – Where a buyer arranges transport but later recovers freight from the supplier (or vice versa), authorities challenge the non-disclosure of service value. Back-to-back documentation to be maintained to save it from forming part as consideration rather than as a reimbursement.
For example – Buyer arranges vehicle for spinning mill but recovers charges under credit notes or billing adjustments.
ITC Eligibility thereof – Under Section 16(1) of the CGST Act, 2017, a registered person is entitled to ITC on goods/services used in the course or furtherance of business, subject to conditions. For GTA under RCM:
RCM paid on freight is eligible for full ITC, as per Section 9(3) and Section 16(1), assuming the supply is for taxable use.
5. Packing Charges – Always Taxable with Supply
Packing charges in the textile sector include:
- Primary packing: Plastic wraps, cones for yarn, polybags for garments.
- Secondary packing: Cartons, crates, or shrink wrap used for transport.
As per Section 15(2)(c), such costs, if charged to the recipient – must be included in the value of supply, even if invoiced separately.
Example:
A garment exporter packs shirts in polybags and then in cartons for export. If ₹5 per shirt is charged for packing, this must be added to invoice value and taxed.
6. Insurance, Loading and Handling Charges
These are classified as incidental expenses under Section 15(2)(c) and (d) and are taxed along with the goods. In textile exports, marine insurance, customs clearance fees, or port handling charges, if arranged and recovered by the supplier—are part of composite supply.
If the customer pays these separately under a different contract, and they were not the supplier’s obligation, they are excluded from the GST value of supply.
7. Composite vs. Mixed Supply:
Composite Supply: When freight, packing, or insurance is naturally bundled with textile goods, and supplied together—GST is levied at the rate of the principal supply (i.e., goods).
Mixed Supply: Rare in the textile industry, but if unrelated services (e.g., freight + promotional consultancy) are billed together, GST applies at the highest applicable rate.
8. Impact of Improper Classification
If a textile company incorrectly omits incidental charges from taxable value or applies incorrect rates (e.g., charging 18% on freight instead of 5% on cotton yarn with bundled freight), it can result in:
- Tax demands and penalties.
- Loss of input tax credit eligibility to buyers.
- Disputes with clients due to tax miscalculations.
9. Points to Remember while considering valuation:
- Always review terms of supply: Is it ex-factory, FOR, CIF?
- Clarify who bears freight and packing in the sales contract.
- Ensure uniform invoicing practices across branches and units.
- Train accounts and sales teams on implications of Section 15(2).
- Where necessary, disclose bundled charges clearly in tax invoices to avoid litigation.
Conclusion:
In the Indian textile industry, freight, packing, insurance, and similar expenses are intrinsic to the movement of goods. As per GST law, these must be judiciously included in the value of supply when appropriate as discussed in the above part of the article.
For more information or questions, you can contact us at roopa@hnaindia.com or yash@hnaindia.com. For further insights into valuation aspects under Section 15 of the GST Act, in the textile sector, you can refer to Guide to GST on the Textile Industry by Taxsutra.
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