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GST and the Indian Textile

Industry
7 Apr 2015
Taxes to be Replaced by GST

►Main Taxes to be replaced are:


►Central taxes

►Central excise duties and

►Service tax along with all relevant cesses and


surcharges
►State taxes

►State VAT

►Central sales tax and

►Entry tax

Page 2 Implications of GST for Indian Textile Industry


Main Advantages of GST

►Indian Wide Common Market


►Absence of Fiscal Barrier (CST/Entry Tax)

►Single or limited number of rates

►Production efficiency: Resource allocation; no


incentive for vertical integration
►Consumption efficiency

►Minimization of classification disputes

►Improved compliance

►Note that the new constitutional amendment


bill proposes a 1% tax on all inter-state supplies
Page 3
Key effects of GST

► GST
► Reform

► Improved Resource
Allocation ► Lower Price of Capital
Goods
► Higher Total
Productivity
► Larger Capital
► Stock
►Improved
Competitiveness

Higher

► Potential Output

Page 4 Implications of GST for Indian Textile Industry


Features of GST in India

►Dual GST: CGST and SGST

►Dual rate structure

►Lower rate: 12 %

►Standard rate: Estimates range from 20-27% for the


composite rate

►Exempt category

►Exports zero-rated, imports taxable

►Inter-state sales subject to IGST=(CGST+SGST)

Page 5 Implications of GST for Indian Textile Industry


Features of Textile Industry

►Large unorganized sector


►Large employment potential

►Mix of traditional and modern

►Low tax incidence

►Differentiated segments; composite


products
►High export contribution and potential

Page 6
Share of Textiles in Potential GST Tax Base

16.00 70.0

14.00
60.0

12.00
50.0
10.00

40.0
8.00

6.00 30.0

4.00 20.0

2.00
10.0

0.00
2004-05
2006-07
2008-09
2010-11
2012-13

0.0
1974-75
1970-71
1972-73

1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03

Clothing and furnishing (% to PFCE) PFCE excluding food, education, and health

Page 7
Key aspects of current taxation system as it applies
to Textiles
►Usually low/ zero rates of taxes on final products
►Tax is shifted back to production (as opposed to consumption) leading to
blocked input taxes and higher cost of production
►Inefficiencies in production
►Exemption of production inputs
►Duty Drawback Scheme
►Exemption by size of operation, giving rise to fragmentation of industry
►Complexities in compliance and administration
►Ad-hoc or piecemeal efforts to apply tax leads to significant opposition
from all segments of textiles industry. Any piecemeal tax is complex,
creates competitive distortions and is subject to collusion/ harassment
by Tax Administration authorities

Page 8 Implications of GST for Indian Textile Industry


Key aspects of current taxation system

►Classification disputes
►Fabrics vs garments, e.g. should Sarees be treated as fabrics or as readymade
garments
►Lack of Fibre neutrality
►Cotton fibre vs manmade fibre. Cotton fibre treated favorably as compared to
man-made fibres
►Effective tax rates vary by degree of integration
►Power looms vs Composite mills. Effective tax rates for composite mills higher
than that of power looms discouraging integration of production adversely
affecting efficiency

Page 9 Implications of GST for Indian Textile Industry


Textile segments

Nine broad categories


1. Khadi and handlooms
2. Cotton textiles
3. Woollen textiles
4. Silk textiles
5. Artificial silk and synthetic fibre textiles
6. Jute, hemp, and mesta textiles
7. Carpet weaving
8. Ready-made garments
9. Miscellaneous textile products

Page 10 Implications of GST for Indian Textile Industry


Key concerns of textiles industry

►Break in input tax credit chain leads to blocked input taxes


►Complexities and distortions related to Small Business Threshold
►High compliance cost, especially for small units
►Lack of uniformity in Centre and States taxes: e.g., presently Job
Workers are treated differentially under CENVAT and State VAT
►Continuing blockage of input taxes under GST – Petroleum products,
Electricity, Real estate
►Possibility of some the taxes continuing after GST: e.g. Octroi, Entry tax,
Electricity duty

Page 11 Implications of GST for Indian Textile Industry


Estimated share of textile segments in tax base

Relative Shares in Estimated GST Tax


Textile Outputs
Base (%)
Khadi, cotton textiles (handlooms) 1.2
Cotton textiles 39.5
Woollen textiles 4.3
Silk textiles 1.6
Art silk, synthetic fibre textiles 18.7
Jute, hemp, mesta textiles 0.8
Carpet weaving 1.0
Readymade garments 16.3
Miscellaneous textile products 16.6
Total 100.0

Page 12 Implications of GST for Indian Textile Industry


Input structure across the nine textile categories
- Shares by types of inputs

textile products
Carpet weaving
Cotton textiles

synthetic fibre

Miscellaneous
mesta textiles
Khadi, cotton

(handlooms)

Readymade

fibres, resin
Jute, hemp,
Silk textiles

garments

Synthetic
Woollen

Art silk,
textiles

textiles

textiles
Structure of
Inputs

Textile inputs 46.3 52.1 45.1 38.7 40.6 38.4 42.2 47.1 41.3 14.1

Non-textile
16.2 11.9 19.5 25.2 28.4 19.5 19.9 16.5 23.4 58.4
inputs (goods)

Non-textile
36.5 34.2 33.9 35.0 29.7 39.6 36.7 35.3 33.6 22.4
inputs (services)

Total Non-
52.7 46.1 53.4 60.2 58.1 59.0 56.6 51.9 57.0 80.7
textile inputs

Non-textile
inputs (not 1.0 1.8 1.4 1.0 1.3 2.5 1.2 1.0 1.7 5.2
shown)

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Page 13 Implications of GST for Indian Textile Industry


Current Effective Tax Rates (RNR)
- Combined for Centre and States

Textile Categories RNR (%)


Khadi, cotton textiles (handlooms) 4.0
Cotton textiles 7.1
Woollen textiles 9.3
Silk textiles 9.6
Art silk, synthetic fibre textiles 10.2
Jute, hemp, mesta textiles 9.0
Carpet weaving 5.6
Readymade garments* 10.5
Miscellaneous textile products 12.0
All Segments 9.3

Page 14 Implications of GST for Indian Textile Industry


Price and Income Effects
- Net effect on demand due to a shift to GST from the current indirect tax
structure
Category Base price Base+ Base+GST Increase Change in Change in Net
Present in price demand (own demand Change
Taxes (%) price relative to (income in
all prices effect) effect (%) demand
(%) (%)

Khadi, cotton
100 104.0 112 7.7% -2.2% 0.8% -1.4%
textiles (handlooms)
Cotton textiles 100 107.1 112 4.6% -1.3% 0.8% -0.5%
Woolen textiles 100 109.3 112 2.4% -0.7% 0.8% 0.1%
Silk textiles 100 109.6 112 2.2% -0.6% 0.8% 0.1%
Art silk, synthetic
100 110.2 112 1.6% -0.5% 0.8% 0.3%
fiber textiles
Jute, hemp, mesta
100 109.0 112 2.8% -0.8% 0.8% 0.0%
textiles
Carpet weaving 100 105.6 112 6.1% -1.7% 0.8% -1.0%
Readymade
100 110.5 112 1.4% -0.4% 0.8% 0.4%
garments
Miscellaneous textile
100 112.0 112 0.0% 0.0% 0.8% 0.7%
products

Total 100 109.3 112 2.5% -0.7% 0.8% 0.0%

Assumption: GST is levied at a single rate of 12%

Page 15
Key empirical findings

►Overall current RNR lower than the sum of lower CGST and SGST rates
(12%); implies additional tax burden

►Blocked input taxes are relatively more for State VAT since output tax
rates are zero for most categories compared to Cenvat where Input
Cenvat on goods and service tax on service inputs are both rebated

►Category-wise RNR is highest for ready made garments and artificial


silk and synthetic fibre textiles

Page 16 Implications of GST for Indian Textile Industry


Likely impact of GST

►If applied uniformly, GST is likely to address all concerns of industry


►It will eliminate any blockage of input taxes caused due to break of input tax
credit chain
►Provide level playing field to all segments of textile industry
►Shift in tax burden from Production to Consumption (GST is a Consumption Tax)
►Significant simplification in compliance due to GSTN
►VAT rates on textiles in some international jurisdictions
► South Asia: Pakistan (5%), Bangladesh (15%), Sri Lanka (12%)
► Developed nations: Australia (10%), New Zealand (15%), Japan (5%, 8% from 1 April
2014 and 10% from 1 Oct 2015), UK (20%), Germany (19%), France (19.6%)
► China: 13%, 3% for SMEs without input tax credit

Page 17 Implications of GST for Indian Textile Industry


Likely impact of GST

►Key concern – Increase in tax burden from 9.3% to possibly 12% which
may lead to a reduction in demand
►However overall impact may not be negative
►Greater efficiency in production – may lead to downward movement of prices
►Exports may go up due to true zero rating
►A major reform like GST will lead to higher GDP and higher disposable
incomes
►Price and Income elasticity of demand may compensate for each other

Page 18 Implications of GST for Indian Textile Industry


Key effects of GST

If all textile categories are put at the lower CGST and SGST rates, key effects
will be as follows:
1. Transparency effect
► Tax burden will be more transparent since blocked input taxes will be eliminated, all
input taxes will be fully rebated

2. Automatic zero-rating of exports


► Some of the present export-subsidy schemes may need to be redesigned or
eliminated; thus, exports will be encouraged under GST without the need for explicit
subsidy schemes

3. Additional Revenue Effect


► The overall tax incidence on textile products will increase; the additional revenue can
be used to redesign subsidy scheme for mitigating adverse impact on lower income
groups; a distinction may need to be made between product groups where RNRs are
close to the average and products where they are considerably lower

Page 19 Implications of GST for Indian Textile Industry


Key effects of GST

4. Present zero-rating of textile outputs in the case of State VAT will go away
and taxes paid on capital goods and textile machinery will also be rebated
5. Productivity Enhancing Effects; Improvement in allocative efficiency;
modernization of textile sector encouraged
6. Improved Compliance Effect
► With input tax credit at each stage of value added and creation of information
chain, there would be automatic improvement in compliance
7. Keeping the same GST rate for all textile segments will facilitate further
experimentation in mixing and blending as it can be done without any tax
implication
8. Present GST discussions indicate that cascading may continue with respect to
petroleum products that serve as inputs; to that extent the burden on artificial silk
and synthetic fibres will continue; since much of these products are exported, this
disadvantage may continue unless a suitable mechanism is found to rebate input
Page 20
tax on petroleum products
Implications of GST for Indian Textile Industry
Policy Options under GST

►Key objective for options should be:


►Production efficiency
►Market Neutrality
►Minimize incremental burden on lower-income households
►A uniform and comprehensive GST most conducive for production efficiency
and market neutrality
►Minimizing incremental burden on lower-income households is the remaining
policy objective that could warrant deviation from a uniform GST

Page 21
Pattern of expenditure on essential items in Urban India
- Share of Monthly per capita expenditure 2011-12

Fractile Processed Fuel and Clothing & Other


Basic Food Medical Total
Class Food light bedding expenditure
0-P5 52.2 7.0 11.4 6.8 3.0 19.5 100
P5-P10 50.8 7.8 10.5 6.3 3.6 21.0 100
P10-P20 48.7 7.5 9.7 6.2 4.2 23.7 100
P20-P30 46.8 7.6 9.0 6.2 4.3 26.0 100
P30-P40 45.0 7.7 8.6 6.0 4.5 28.2 100
P40-P50 42.0 8.2 8.1 6.0 4.6 31.1 100
P50-P60 40.8 7.7 7.5 5.8 5.5 32.7 100
P60-P70 38.1 8.3 7.1 5.7 5.5 35.3 100
P70-P80 35.3 8.6 6.7 5.4 5.6 38.5 100
P80-P90 31.6 8.9 6.1 5.2 6.0 42.2 100
P90-P95 26.7 9.7 5.6 5.2 6.4 46.4 100
>P95 16.4 11.5 4.1 4.2 6.4 57.5 100
All 33.6 9.0 6.7 5.4 5.5 39.8 100

Page 22 Implications of GST for Indian Textile Industry


Policy options

►Zero rating

►Exemption

►Lower rate of tax

►Standard rate of tax with appropriate subsidies

Page 23 Implications of GST for Indian Textile Industry


Policy options
- Pros and Cons

►Zero rating
► Zero rating is possible only if all Input taxes are refunded
► Most jurisdictions find it difficult to administer and monitor input tax refunds
► Zero-rating in India proposed to be limited to exports

►Exemption

► Most distorting option


► Results in higher tax incidence due to blocked input taxes and tax cascading
► Shifts tax burden from Consumption to Production
► Exemption to fabrics leads to pressure from industry for exemption from production
inputs as well. This leads to complex administration of tax

Page 24 Implications of GST for Indian Textile Industry


Policy options
- Pros and Cons
►Lower rate of tax
► Advisable only if government chooses to have a lower GST rate
► Lower rate should be extended to all fabrics and personal wear items to avoid
classification disputes and market distortions
► However, difficult choices to be made:
► Fabrics Vs Apparel for personal wear
► Home textiles
► Technical textiles
► If
inputs are taxable at higher rate and outputs are taxable at lower rate, refund and
monitoring of refunds issues will arise

►Standard rate of tax with appropriate subsidies


► Clean tax system
► Achieves production efficiency, which is the key concern as opposed to the regressivity
of the tax system
► Can be accompanied by an appropriate subsidy regime to support weakest segments of
the textile industry

Page 25 Implications of GST for Indian Textile Industry


Supplementary Slides

Page 26
Pattern of expenditure on essential items in Rural India
- Share of Monthly per capita expenditure 2011-12

Fractile Basic Processed Fuel and Clothing & Other


class Medical Total
Food Food light bedding expenditure
0-P5 52.9 7.7 12.4 7.4 3.1 16.6 100
P5-P10 52.4 7.8 11.4 7.2 3.8 17.5 100
P10-P20 52.7 7.6 10.6 6.9 4.0 18.2 100
P20-P30 51.7 7.5 10.2 6.7 4.7 19.1 100
P30-P40 51.1 7.8 9.5 6.6 4.7 20.4 100
P40-P50 50.1 8.0 9.1 6.6 4.9 21.4 100
P50-P60 49.3 7.7 8.8 6.6 5.4 22.2 100
P60-P70 47.8 7.9 8.4 6.2 5.5 24.2 100
P70-P80 46.4 7.8 7.9 6.0 6.4 25.5 100
P80-P90 44.0 7.8 7.4 5.8 7.2 27.8 100
P90-P95 39.9 7.7 6.6 5.5 8.7 31.6 100
>P95 30.8 8.7 4.5 4.4 11.0 40.5 100
All 45.0 7.9 8.0 6.0 6.7 26.5 100

Page 27 Implications of GST for Indian Textile Industry


Thank you

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