Apparel sector of India is one of the oldest and largest contributors toward the development of the Indian economy, concerning GDP, employment, export promotion, etc. Known as one of the oldest manufacturing industry in the country and the second largest after agriculture, the textile industry employs both skilled and unskilled people. The industry contributes more than 14% of the total annual exports of the country which is likely to increase under the Goods and Services Tax (GST) regime. Pre-GST era with the support from the global economy this sector was doing well in India. With the arrival of GST, which is no doubt a daring step by the government to strengthen the economy, this sector particularly export of apparel has suffered a jolt. After implementation of the Goods and Services Tax the scenario is as under in the apparel sector.

 RATE OF TAX (GST) ON TEXTILE GOODS:

Knitted apparel and clothing falls under chapter 61 of the HSN code under articles of apparel and clothing accessories. Apparel and clothing not knitted falls under chapter 62 of the HSN code. Other textile products like curtains, bed sheets, used clothes, etc., have been listed under chapter 63 of the HSN code under other made up textile articles, sets, worn clothing and worn textile articles; rags. Under the all categories, any piece of apparel or clothing would be taxed at 5% GST if the taxable value of the goods does not exceed Rs.1000 per piece. All types of apparel and clothing of sale value exceeding Rs. 1000 per piece would be taxed at 12% GST.

HSN Description of Goods Unit GST Rates
CGST SGST IGST
61,62 & 63 Articles of apparel and clothing accessories falling under chapter 61, 62 and 63, of sale value not exceeding Rs. 1000/- per piece. u 2.5% 2.5% 5%
61,62 & 63 Articles of apparel and clothing accessories falling under chapter 61, 62 and 63, of sale value exceeding Rs. 1000/- per piece. u 6% 6% 12%

Fabrics are classifiable under chapters 50 to 55 and 60 of the First Schedule to the Customs Tariff Act, 1975 on the basis of their constituent materials and attract a uniform GST rate of 5%. Garments and made up articles of textiles under chapters 61, 62 and 63 attract GST at the rate of 5% when value is upto Rs. 1000 per piece and 12% when the value exceeds Rs. 1000 per piece.

Rs. 1000/- per piece refers to sale value, i.e. value at which such pieces are being sold by the supplier. It is possible that a particular piece when sold by manufacturer to retailer may have sale price of less than 1000/- rupees and attract lower tax rate and may be sold at the sale price of more than Rs. 1000/- from the retailer shop and may attract a higher tax rate.

Classification of fabrics:

Vide Circular No. 13/13/2017-CGST, dated 27th October, 2017 [2017 (6) G.S.T.L. C6], it has been clarified that mere packing of fabrics into pieces of different lengths will not change the nature of these goods and such pieces of fabrics would continue to be classifiable under the respective heading as the fabric and attract the 5% GST rate. This clarification would equally apply to three pieces of fabrics sold in a pack as ladies salwar suit. Any embroidery on a fabric piece or certain embellishment thereon does not change the basic nature of their being a fabric.

Before becoming readymade articles or an apparel, the fabric is cut from bundles or thans and sold in that unstitched state with certain embellishment like gota etc. The consumers buy these sets or pieces and get it tailored which entails cutting of fabric in shape and stitching thereof. Such cut fabric pieces remains fabric for the purposes of classification of goods. Mere cutting and packing of fabrics into pieces of different lengths from bundles or thans, will not change the nature of these goods and such pieces of fabrics would continue to be classifiable under the respective heading as the fabric and attract the 5% GST rate.

Other Classification Issues:

– Wet baby wipes/wet face wipes are classifiable under Custom Tariff 3307; In Re: Ginni Filament Limited [2018 (16) G.S.T.L. 648 (A.A.R. – GST)]

-PVC Mats classifiable under entry 3918, In Re: National Plastic Industries Limited [2018 (16) G.S.T.L. 287 (App. A.A.R. – GST)]

– Reusable baby cotton nappies classifiable under heading 6111, Suchita Industries v. Commissioner [2017 (7) G.S.T.L. 250 (Tri. – Bang.)]

TREATMENT OF EXPORT:

As per the provisions contained under IGST law, export of goods or services or both are to be regarded as “zero-rated supplies” and a person being a registered taxable person exporting such goods or services or both shall be allowed to claim the refund of the GST paid under one of the following two options:

  • Export of goods or services or both under bond or letter of undertaking (LUT) without paying any Integrated Tax and can claim the refund of unutilized input credit.
  • Export of goods and service or both on the payment of Integrated Tax and the exporter can claim the refund of the GST paid on such goods and services so exported. The above-mentioned refunds will be subject to certain rules, procedures, and safeguards as may be prescribed.

JOB WORK ACTIVITY:

As per clause (68) of section 2 of the CGST Act, 2017, “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly. The rate of tax on job work activity related to textile and textile products falling under chapter 50 to 63 under the service code heading (SAC) 9988 the rate of 5% vide notification No. 20/2017-Central Tax (Rate) dated 22.08.2017.

It may be noted that the responsibility of keeping proper accounts of the inputs sent for job work lies with the principal. Moreover, if the time frame of one year for bringing back or further supplying the inputs is not adhered to, the activity of sending the goods for job work shall be deemed to be a supply by the principal on the day when the said inputs were sent out by him. It may be noted that the responsibility for sending the goods for job work as well as bringing them back or supplying them has been cast on the principal.

DUTY LIABILITY UNDER RCM:

On little activity of supply of goods or services or both the burden of liability to pay tax on taxable supplies to any other person other than the supplier under sub-section (3) and sub-section (4) of section 9 of the CGST Act, or sub-section (3) or sub-section (4) of section 5 of IGST, Act. As per above mentioned sections tax is required to be paid by the recipient supply rather than the supplier. The list of supply of services under reverse charge system is as follows:

S. No. Description of supply of service Supplier of service Recipient of service
1. Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient. Any person located in a non-taxable territory Any person located in the taxable territory other than non-taxable online recipient.
2. GTA Services Goods Transport Agency (GTA) Any factory, society, co- operative society, registered person, body corporate, partnership firm, casual taxable person; located in the taxable territory
3. Services supplied by an individual advocate including a senior advocate by way of representational services before any court, tribunal or authority, directly or indirectly, to any business entity located in the taxable territory, including where contract for provision of such service has been entered through another advocate or a firm of advocates, or by a firm of advocates, by way of legal services, to a business entity. An individual advocate, including a senior advocate or a firm of advocates Any business entity located in the taxable territory
4. Services supplied by an arbitral tribunal to a business entity An arbitral tribunal Any business entity located in the taxable territory
5. Services provided by way of sponsorship to anybody corporate or partnership firm Any person Anybody corporate or partnership firm located in the Taxable territory
6. Services supplied by the Central Government, State Government, Union territory or local authority to a business entity excluding: –

(1)  renting of immovable property, and

(2)   services specified below: –

(i)   services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Central Government, State Government or Union territory or local authority;

(ii)   services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii)   Transport of goods or passengers.

Central Government, State Government, Union territory or local authority Any business entity located in the taxable territory
7. Services supplied by a director of a company or a body corporate to the said company or the body corporate A director of a company or a body corporate The company or a body corporate located in the taxable territory
8. Services supplied by an insurance agent to any person carrying on insurance business An insurance agent Any person carrying on insurance business, located in the taxable territory
9. Services supplied by a recovery agent to a banking company or a financial institution or a non-banking financial company A recovery agent A banking company or a financial institution or a non- banking financial company, located in the taxable territory
10. Services supplied by a person located in non- taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India. A person located in non-taxable territory Importer, as defined in clause (26) of section 2 of the Customs Act, 1962(52 of 1962), located in the taxable territory.

The list of supply of goods under reverse charge system is as follows:

HSN Code Description of supply of Goods Supplier of goods Recipient of Goods
5004- 5006 Silk yarn Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn Any registered person
5201 Raw Cotton Agriculturist Any registered person
Any Chapter Used vehicles, seized and confiscated goods, old and used goods, waste and scrap Central Government, State Government, Union territory or a local authority Any registered person

EWAY BILL:

EWay Bill is an Electronic Way bill for movement of goods to be generated on the eWay Bill Portal. A GST registered person the value of goods is worth more than Rs 50,000 (Single Invoice/bill/delivery challan) and is made to or from a registered person then, the registered person or the transporter must generate EWB. E-Way bill should be generated when there is Inter-state & Intra-state movement of goods in relation to:

  • Supply
  • Reasons other than a supply.
  • Inward supply from an unregistered person.
  • An e-way bill is required even if goods are transferred from one vehicle to the other.
  • A consolidated e-way bill is required for multiple consignments.

INPUT TAX CREDIT (ITC) UNDER GST:

Section 16(1) of the CGST Act provides that every registered person is entitled to take credit of input taxes charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. The said amount shall be credited to his electronic credit ledger. The provisions provide for following principles;

  1. A registered person is entitled to take credit. Thus, to avail any input credit, registration of a person is must.
  2. Input tax is available on all supply of goods and services equivalent to the amount of tax charged.
  3. The aforesaid goods or services or both must be used or intended to be used either in course of business or in furtherance of his business.

RESTRICTIONS ON INPUT TAX CREDIT (ITC) UNDER GST:

One of the important aspects of GST is on which supplies is the input tax credit not available or is prohibited. Under section 17(5) of CGST Act, there are certain supplies on which input tax credit under GST is not available.  These supplies can also be said as blocked credit. Section 17(5) read as follows:

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a) motor vehicles and other conveyances except when they are used––

(i) for making the following taxable supplies, namely:—

(A) further supply of such vehicles or conveyances ; or

(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre;

(iii) rent-a-cab, life insurance and health insurance except where––

(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person exception goods imported by him;

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

REFUND OF INPUT TAX CREDIT (ITC):

The refund is very important aspect in apparel sector. Most of the textile assessee exported the goods. The tax paid on input is more than the output tax liability or the same is accumulated due to zero rated supply under letter of undertaking or bond. The assessee is entitled for the refund in case of zero rated supply of goods or services made without payment of tax and refund is also given in case credit has accumulated due to higher amount of tax on input and lower amount of tax on output supply.

DUTY DRAWBACK:

Duty drawback is a refund in payments that were initially collected upon importation of foreign-made goods; these payments could have been for Customs duties or other fees. Customs issues these refunds only when the imported merchandise is only exported the goods. Pre-GST duty drawback on the textile sector was in higher side but after implementation of the GST rate of duty drawback was reduced.

The following table shows the changes in the All Industry Rates (AIR) of Duty Drawback:

ITEM OLD RATES (AIR) NEW RATES (AIR)
Cottons Garments 7.7% 2%
Garments containing cotton and man-made fiber (MMF) blend 9.5% 2.2%
MMF Garments 9.8% 2.5%
Clothing items made of silk HS Code 61 & 62), except Noil silk 7.6% 4.8%
Woolen Garments 8.7% 3.5%
Wool & MMF blend garments N/a 3%
Other garments N/a 2%

ROSL:

The Government has announced Post GST Rates for Rebate of State Levies (ROSL) on Export of Garments and Made-ups vide Ministry of Textiles Notification No. 14/26/2016-IT dated 24.11.2017. These RoSL rates are for Garments, under AA-AIR combination and made-up textile articles. These rates were effective from 01.10.2017.

Post-GST rates of RoSL are as follows:

Sr. No. Item Rate
(1) Cotton garments upto a maximum of 1.70%
(2) MMF, Silk and Woolen garments 1.25%
(3) Apparel of blends 1.48%
(4) Cotton made-ups maximum of 2.20%
(5) MMF and silk made-ups 1.40%
(6) Made-ups of blends 1.80%
(7) Sacks and bags made of jute 0.60%
(8) Garments under AA-AIR combination 0.66%

Author: Arun Kumar Singh, Senior Associate

Rajesh Kumar and Associates

Contact: arun@rklegal.org; Ph: +91 9818350318

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7 Comments

  1. Krishna reddy says:

    Sir. I have ready made shop my business turnover is 12-15 lakhs per year should I pay gst 5% on cloths ( shirts jeans pants t shirts etc )

    1. RKLEGAL says:

      Keep the charges separate in the invoice, with different rate of GST- 5% on apparel and 18% on shipping charges.
      If it becomes a composite supply with shipping, it shall be a supply of apparel which shall attract rate @12%.

  2. MUKESH NAYAR says:

    Sir is it correct Vide Notification No.2/2019 dated 29.01.2019 The CGST Act was amended wef 01.02.2019 regarding Reverse Charge Mechanism(RCM) which narrated to notify later the class of the Registered dealers and list of the categories of the goods/services which is still awaited..

    1. RKLEGAL says:

      Yes. Vide CGST Amendment Act, 2018; Section 9(4) of the CGST Act [reverse charge liability on registered person when goods or services were procured from unregistered person] has been amended with effect from 01.02.2018. Now the government has been empowered to notify supplies on which such tax on reverse charge can be levied. No such notification has been issued as yet. Thus the provision is not on operation as of now.

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