Goods and Services Tax (GST) is a proposed system of indirect taxation in India merging around 17 existing taxes into single system of taxation. It was introduced as The Constitution (One Hundred and First Amendment) Act 2016. The GST is administered & governed by GST Council and its Chairman is Union Finance Minister of India Arun Jaitley and till March 31,2017 Thirteen  council meeting was held for proper implementation of GST in India.
GST would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments.
This method allows GST-registered businesses to claim tax credit to the value of GST they paid on purchase of goods or services as part of their normal commercial activity. Taxable goods and services are not distinguished from one another and are taxed at a single rate in a supply chain till the goods or services reach the consumer. Administrative responsibility would generally rest with a single authority to levy tax on goods and services. Exports would be considered as zero-rated supply and imports would be levied the same taxes as domestic goods and services adhering to the destination principle in addition to the Basic Customs Duty which will not be subsumed in the GST.
The introduction of Goods and Services Tax (GST) would be a significant step in the reform of indirect taxation in India. Amalgamating several Central and State taxes into a single tax would mitigate cascading or double taxation, facilitating a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25%-30%, free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax and reduction in paperwork to a large extent.
What changes there would be if India launches GST- “The tax rate under GST may be nominal or zero rated for the time being. It has been proposed to insulate the revenues of the States from the impact of GST, with the expectation that in due course, GST will be levied on petroleum and petroleum products.” The central government has assured states of compensation for any revenue losses incurred by them from the date of introduction of GST for a period of five years under Compensation act.
As India is a federal republic GST would be implemented concurrently by the central government and by state governments
Article Discusses the Following-
|1||Current Tax Structure|
|2||Impact on Input Tax Credit on various Taxes paid|
|3||Issues in Current Tax Structure|
|4||Textile in GST System|
|5||Impact of GST on Textile Sector|
|6||Impact on Registration, Return and Accounting|
|7||Some GST Negative Impact on Textile Industry|
|8||Some Other Points related to GST|
> The expected rate of GST would be 5 or 12 %. Net of credit maybe still 3-4% or 8-10% respectively. Final cost would increase upto some extend. The unorganized industry would not be in advantageous situation in GST. Stocking pre GST would reduce in this industry. Job workers, fabric manufacturers or garment units would have to maintain proper books of accounts
> There may be a few drawbacks for the textile industry due to the higher tax rate and removal of benefits under cotton value chain, but GST will help textile industry in the long run by getting more registered taxpayers under a regulated system.
India’s textiles sector is one of the oldest industries in Indian economy from many centuries. Even in present also, textiles sector is one of the largest contributors to India’s exports with approximately 11 % of total exports. The textile industry is also includes labour aspect and is one of the largest employment generating industry. The textile industry has two broad segments. First, the unorganised sector consists of handloom, handicrafts and sericulture, which are operated on a small scale and through traditional tools and methods. The second is the organised sector consisting of spinning, apparel and garments segment which apply modern machinery and techniques such as economies of scale.
The textile industry employs about 4 crore workers and 6 crore indirectly. India’s overall textile exports during FY 2015-16 stood at US$ 40 billion.
The Indian textiles industry is extremely varied, Labour intensive with the handspun and hand-woven textiles sectors at one end of the spectrum, while the capital intensive sophisticated mills sector at the other end of the spectrum. The decentralised power looms/ hosiery and knitting sector form the largest component of the textiles sector. The close linkage of the textile industry to agriculture for raw materials such as cotton and the ancient culture and traditions of the country in terms of textiles make the Indian textiles sector unique in comparison to the industries of other countries. The Indian textile industry has the capacity to produce a wide variety of products suitable to different market segments, both within India and across the world.
The Indian textiles industry, currently estimated at around US$ 108 billion, is expected to reach US$ 223 billion by 2021. The industry is the second largest employer after agriculture, providing employment to over 40 million people directly and 60 million people skilled and unskilled workers indirectly. The Indian Textile Industry contributes approximately 5% to India’s Gross Domestic Product (GDP), and 14% to overall Index of Industrial Production (IIP).
The Indian textile industry has the potential to reach US$ 500 billion in size. The growth implies domestic sales to rise to US$ 315 billion from currently US$ 68 billion. At the same time, exports are implied to increase to US$ 185 billion from approximately US$ 41 billion currently.
Indian exports of locally made retail and lifestyle products grew at a compound annual growth rate (CAGR) of 10 per cent from 2013 to 2016, mainly led by bedding bath and home decor products and textiles.
It contributes about 11% of the total annual export, and this value is likely to increase under GST. GST would affect the cotton value chain of the textile industry which is chosen by most small medium enterprises as it currently attracts NIL central excise duty.
It is expected that the tax rate under GST would be higher than the current tax rate for the textile industry. Natural fibers (cotton, wool) which are currently exempt from tax, would be taxed under GST. Despite this, the textile industry as a whole would benefit from the introduction of GST
The Textile industry can be broadly classified into two segments:
i Yarn & Fibre (Natural & Man-made)
ii Processed Fabrics, Ready-made garments & Apparels
Mainly Two types of Indirect Taxes are Central Excise Duties and Service Tax. Service is not levied on Textile since it comes under Goods.
Under current taxation system, textile products are mostly exempted or are taxed at very low rate. State Governments have stopped levying Sales Tax after the discontinuation of Additional Excise Duty.
> GST/VAT Rate on Textile Industry in other Countries:
|South Asia||China||Developed Countries|
|Pakistan -5%||13%, 3% for SMEs |
without input tax credit
|Bangladesh- 15%||New Zealand -15%|
|Srilanka -12%||Japan- 8%|
1) Current Tax Structure
Various indirect taxes on textile sector are indifferent across its various sectors. Most of their products are either exempt or are taxed at a relatively lower rate and are extensively subsidized under different central and state regimes.
Central Excise duty Central excise duty was first introduced on woven garments in year 2001 which was subsequently extended to entire textile industry by 2003.
The excise duty exemption option was also provided vide notification no.30/2004 with condition of non-availment of Cenvat credit.
There was also an option to pay concessional rate of excise duty with CCR benefit. However, almost all assesses opted for exemption.
In 2011, mandatory excise duty was reintroduced on branded garments with CCR benefit and abatement of 55% for duty payment. This mandatory levy was again removed in 2013 and optional scheme of paying duty with CCR benefit was continued. In 2016, mandatory excise duty has been introduced again on branded ready made garments made up of textiles falling under central excise tariff heading 61, 62 and 63. The levy is attracted only when retail sale rice (RSP) is Rs.1000/- or more and levy is only on 60% value after standard abatement of 40%. For payment of duty, rate of 2% without Cenvat credit or 12.5% with Cenvat credit option is applicable.
Non-branded goods continue with “Nil”levy without CCR benefit. Otherwise, option of paying 6% with CCR in case of garments / articles of cotton, not containing any other textile material is available. For garments of other composition, “Nil”rate without Cenvat credit or 12.5% with Cenvat credit is available. Job Work In garment industry many times, brand name owners outsource the goods manufactured completely or on job work basis. There are special provisions that the central excise duty levy which in normal course should be with the job worker gets shifted to brand name owner. Such brand name owner instead of job-worker needs to register and comply with excise provisions. Brand name owner alternatively could authorize his job-worker to obtain registration and pay the duty on goods.
Most of the states in India has exempted textiles and fabrics from levy of VAT. Garments including textiles are being subject to lower rate of VAT in many states. For example, in Karnataka state, ready made garments and other articles suffer lower rate of 5.5% tax. Textiles are exempted from VAT. For small players, the option of paying taxes at concessional rates is also provided under composition scheme in many states.
In case of many states, entry tax is levied on specified goods when goods enter local area. Even textiles such as cotton, woolen or silk or artificial silks are liable to entry tax in states like Karnataka at the rate of 1% which is adding to purchase cost.
|Types of Taxes||Levied By||Charged on||When Charge able||Rate||Add. Rate |
|Excise Duty||CG under the Central Excise Act, 1944||Charged on the |
manufacture of goods & are meant for domestic consumption
|At the time of |
|Domestic textile industry has an optional route to pay Zero excise |
duty, provided they don’t
claim the Input Tax Credit (ITC).
|Cotton based industry are exempt from payment of excise & apparels have been attracting excise duty at effective rate of 1.2% (@ 2% with abatement |
|Special ED & Add. duty of excise are also charged|
|VAT||State governments on intra- state sale of goods||Sale of Goods||At the time of |
|Currently in most of the states VAT on apparels is @ 4-5%.||Composite scheme of |
taxation (applicable with turnover of up to Rs 1.5 crore)
|VAT is applied by the SG at each stage of sale, with credit for the input |
|CST||Union government but collected and retained by the state governments||Sale of Interstate goods||at the time of |
|Entry Tax||State Govt||on entry of goods into a local area for consumption||At the time of |
|Custom Duty||C.G.||On Export/Import of |
|At the time of |
|0 %||Raw cotton and cotton waste, imports are leviable to CVD and special |
2) Impact on Input Tax Credit on various Taxes paid
|Particular||Present Tax System||GST System||Remark|
|Excise Duty||–Not Available–||-Credit available-||Have Positive impact & will reduce price|
|CST||–Not Applicable–||-CST will be removed-||No impact|
|Input Credit on Capital Goods||—Not Available—||-Credit available–||Have Positive impact|
3) Issues in Current Tax Structure
|1||Compliance Cost for Small Scale Business||Small Scale Composition Taxpayer is hesitant to join Credit chain as it increases the compliance cost of engaging professional to meet their Tax obligation.|
|2||No Input tax |
|Most of Textile tax payer use composition scheme. Where Registered Taxpayer purchases goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Input Credit chain. Input Tax credit paid on the transaction is included in the cost of the product making the product costly.|
|3||Job Worker||Every person who gets the goods, produced or manufactured on his account on job work, shall pay the duty leviable on such goods. Hence, it is the raw material supplier (RMS) and not job worker who is liable to excise duty under current regime.|
|4||Branded Goods||Affixing of the brand name on goods amounts to manufacture and the person affixing brand name would be liable to pay the excise duty.|
|5||Treatment of Job Worker||ED:-Job work units are treated like any other manufacturing unit with job workers paying CENVAT on processed fabrics and getting a credit of excise duty paid on their inputs i.e. grey fabrics. |
State VAT treats job workers under the Works Contract category, where job worker pay tax on the total value of goods used in processing the fabric like dyes etc. including gross profit. This leads to a difference in tax base with the CENVAT tax base being more than the State VAT tax base.
|6||Octroi and entry tax etc||Increases Cascading effect thus increase the cost|
4) Textile in GST System
Final Impact of GST on textile industry could be determined only after final rates are declared for the goods on May 18-19 2017 in 14th GST Council meeting.
Presently, most of the garment manufacturers opt for either complete excise duty exemption or payment at 2% duty without Cenvat credit benefit as most of the raw materials do not suffer excise duty, especially in case of cotton based sector. On branded garments, the effective excise duty rate would be 1.2% (if opted for 2% payment with abatement of 40%) or 7.5% (if opted for 12.5% payment with abatement of 40%).
The sales tax would also be paid at lower rates or at concessional rates under composition schemes as applicable in different states.
Exports have continued to be free from taxes all these years.
In GST regime, most of the indirect taxes such as central excise duty, service tax, VAT / Sales tax and entry tax would get subsumed. For textile and its products, the GST rate of 5% is expected and if it’s declared at 12%, then it could have a negative impact as the industry is as such price sensitive. Paying 12% GST would be costlier for assesses who presently paying 1.2 % excise duty + 5% to 6% of VAT which amounts to 6 to 7.2% tax. Even input tax credit on inputs and input services may not be sufficient to fill the gap as natural raw materials such as cotton may continue to get exemption in GST regime. It may be noted that other materials such as chemicals, dyes, accessories and packing materials which constitutes around 8% to 12% of total material cost could be liable for standard GST of 18% which is eligible as input tax credit when output GST is paid. However, in case of man made fibre segment, most assesses have been paying excise duty at regular rates along with VAT. Inputs such as polyester fibre, nylon and other petrochemicals suffer excise duty which can be claimed as Cenvat credit. This segment may get level playing field as GST rate of 12% could have positive impact on them who are already paying more than 12% tax. It is expected that there can be a gradual shift in the domestic textile industry towards man made fibre under GST regime due to tax advantage.
5) Impact of GST on Textile Sector
An important determinant of the tax incidence under GST will be the GST rate applicable to the textile segments which will be announced in 14th GST Council meeting on May 18-19, 2017 in Srinagar. If we consider 12% lower rate as recommended by the Dr. Arvind Subramanian Committee, the textile sector is likely to be negatively impacted. The cotton value chain is likely to be the worst affected as it is currently attracting zero central excise duty and tax in inputs may not be more than 2-4%.
> Improved compliances: An important effect of GST would be to improve compliance. The value chain under the GST will be fully traceable. As a result, ITC claims will have to be backed by full information chain of purchases and sales. Improved compliance will automatically lead to higher revenues for any given rate
as long as that rate is not excessively high.
> Revenue Neutral rate (RNR) proposed to be higher under GST: Currently, the State VAT is 4-5% on apparels and with 1.2% effective central excise duty on branded garments with MRP of more than Rs 1000, the overall tax incidence on the finished goods, i.e. apparels is lower than 12%, which is the lowest rate being proposed in GST.
Further the apparel retailers will not have sufficient input credits (such as service tax on rent of showrooms) to offset the increased tax liability if the GST is not levied on upstream sectors like yarn and fabrics and will be negative for retailers.
As CGST and SGST rates are likely to be higher than the current textile sector rate, this will result in the higher revenue to the Central and State Government and Textile Prices will increase. Services are used in Input, this effect would be nullified as all input tax will be rebated.
Since there is a reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry towards manmade fibre. It may be noted that India currently operates with fibre mix of cotton: manmade of 60:40; as against global average of cotton: manmade of 40:60. Man made inputs today suffer 12.5% + average 4-5% VAT which is a cost. In GST it will be available as input credit.
> Fiscal barriers for inter-state movement to be removed: Reduce time of movement and logistic costs, stocking costs and carrying costs.
> Promote Capital investment: With textile sector coming under GST, textile players which are oriented towards domestic markets will be able to set-off the GST paid 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. Taxes paid on purchase and installation of capital asset and equipment can be claimed as Cenvat credit. This will lead to up-gradation and expansion of the Textile Industries with latest Improve technologies.
> Transparent Taxation: – In the current taxation, taxes are being paid on input are being added to cost as the finished product are exempt from Taxes. In GST, Textile Output will be taxed and Input Tax will be rebate whether in the case of export or for domestic use making taxation transparent
> No discrimination of Goods: Under GST, All Fiber will be treated in same way. No discrimination between cotton fiber and man-made fiber is there till now in the defined GST Structure
> Duty Drawback to lose relevance: With Input tax credit chain becoming mocre transparent and integrated, the tax credit for exporters will become easier and full credit of indirect taxes can be claimed; and the duty drawback scheme, which aims to provide credit of indirect taxes, could lose relevance under GST.
> Increase in administrative cost for the textile industry as hitherto most of the activities were out of tax net.
Working of GST Impact on Cost with Compliance and non Compliance of GST
Cost to US
Cost to Purchaser
GST @12 %
Value Additi on + Profit
Sale Price without GST
Sale Price with GST & availing ITC
GST @ 12 %
Non GST Registered
6) Impact on Registration, Return and Accounting
♦ Registration: Firstly small Dealer and non registered dealer to apply for new registration if their turnover exceeds Rs 20 Lac in previous financial year. Dealers need to obtain separate registration for each state even if it pertains to the same dealership and covered under the same PAN. But dealer can opt for multiple registrations within the state for various dealerships.
♦ Returns: Compliance burden will be very high in the GST System as one has to file 37 Returns in one financial year for each registration apart from ISD/TDS returns as the case may be. In case taxes are not paid by the vendors or if the returns are not filed by the vendors, then the credit of such taxes is denied to the customers. Therefore, timely payment of taxes, filing of returns needs to be ensured in the GST
♦ Accounting: Communication, flow of documents from vendor to tax consultant should be before 10th of the subsequent month. Therefore, accounting department needs to be faster.
7) Some GST Negative Impact on Textile Industry
1. Goods Transfers as Stock: Transfer of Goods to other place will be liable for GST if the transfer is in the course of inter-state trade. If there are separate dealerships of a dealer and separate GST registration number is obtained for each such dealership, then transfer of any supply between such dealerships will also be liable for GST. Whereas there is no CST/Tax on stock transfer
2. Advance Booking: It is necessity in this sector to book Goods in advance to meet market demand on payment of certain amount as token money. In GST System Tax has to pay on advance received for booking whereas Currently, VAT is not being paid on such advances as the same is payable at the time of sale of such Goods.
3. Road Tax/ Environment Tax: In the GST System, GST must also include Road Tax. GST model act states that no taxes shall be allowed as reduction from the value except CGST, SGST and IGST. Whereas Currently, Service tax or VAT is not paid on the Road Tax element.
4. Post Supply Discounts: Generally, dealers receive various discounts from its manufacturers based on targets, goods lifted etc. It is to note that post supply discounts will not be allowed as deduction from the value if the same is not linked to any invoice in the GST return.
5. Related Party Transactions: Transaction value can be rejected if the transaction is with any related party or if the same is with any of its other entity with separate GST No. Therefore, value in such cases will be calculated on the basis of valuation rules.
8) Some Other Points related to GST
> Place of supply shall be location of goods at the time at which the movement of goods terminates for delivery to the recipient. The sum and substance of this is that the destination of goods is the place of supply.
> Import, export and supply to SEZ, EOU shall be considered as inter-state Supply
> Import of goods shall be taxed in GST and Tax paid (IGST) on imported goods shall be eligible for credit as input tax credit to the importer.
Exports physical and supplies to SEZ will be treated as Zero Rated Supplies. No tax will be payable on export of goods. However, credit of input tax credit will be available and the same may be utilized by the exporter for other outward In the alternative, the exporter may claim refund of corresponding input tax credit. Export benefits like drawback, rebate/ refund would be available.
Point of Taxation in GST
|SN||Supply||Time of Supply|
|1||Supply of Goods|| |
Earlier of the following:-
(i) The date on which supplier issues an invoice w.r.t. supply or the last date on which he is required to issue invoice
(ii) The date on which supplier receives the payment with respect to supply.
|2||RCM on receipt of goods|| |
(i) Date of receipt of goods or
(ii) Date of making payment or
(iii) Date immediately following 30 days from the date of issue of invoice
|3||Any other||Due date for filing return Date of payment of tax|