TEXTILE SECTOR POST GST

[Dr. Sanjiv Agarwal]

Taxation of textile sector is opaque and non-neutral across its various segments and regions. Many textile outputs are either exempt under the central and state tax regimes or are subjected to relatively low tax rates. Most of the indirect taxes fall on inputs and services. On the whole, the textile sector is lightly taxed and also subsidized. Textile exports are supported through payments of un-rebated taxes (duty drawback) on textile inputs and other subsidies. The GST shall replace a number of earlier central and state taxes. India has a number of schemes for rebating or subsidizing textile exporters

Registration

According to sections 22 and 24 of the CGST Act, 2017, every supplier shall be liable to be registered under the Act in the State from where he makes a taxable supply of goods and/or services if his aggregate turnover in a financial year exceeds rupees 10 lakh in the North-east States including Sikkim and hilly area and rupees 20 lakh for India except North-east States including Sikkim and hilly area. Therefore, threshold limits of rupees 20 or 10 lakh is available for registration under GST. A taxable person can also opt for composition scheme if his aggregate turnover is more than rupees 20 or 10 lakh and less than rupees 50 lakh.

Further, importer, exporter, and any person who make inter-state supplies shall also be considered as a taxable person and is required to be registered under GST irrespective of threshold limits.

Raw jute has been kept at NIL rate of GST i.e. there would be no tax on raw jute. Therefore, as per Section 23 (1) (a) of the CGST Act, 2017 the suppliers dealing only in raw jute are not required to register.

Similarly, Raw Silk has also been kept at NIL rate of GST i.e. there would be no tax on raw silk. Therefore, the suppliers dealing only in raw silk are also not required to register

Further, though cotton has been kept under 5% tax, cotton farmer is not liable to registration under section 23(1) (b) of CGST Act, 2017 as an agriculturist to the extent of supply of produce out of cultivation of land is not liable for registration.

Rate of Tax

In pre-GST period, following tax rate structure was applicable on textile industry-

• Garment manufacturers could opt for complete excise duty exemption or pay a concessional excise duty of 2% (with abatement of 40%), i.e. effective rate of 1.2% was applied for branded garments with MRP of >Rs 1000 without availing input tax credit as most of the raw materials especially cotton based sector did not suffer excise duty.
• There was also an option of paying excise duty @ 7.5% (if opted for 12.5% payment with abatement of 40%) on condition of claiming Cenvat Credit.
• The sales tax or VAT would also be paid at lower rates or at concessional rates under composition schemes as applicable in different states.

Keeping in mind the indirect taxes paid by textile sector, the following position emerged on indirect tax structure for different categories of textiles items :

Segment	Indirect Taxes Rate (%)
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

In this regard, it is pertinent to note that other materials such as dyes, accessories and packing materials which constitutes around 8 to 12% of material cost are placed in 18% standard rate basket of GST which is eligible as input tax credit when output GST is paid. However, in case of man-made fibre segment, manufacturers are paying excise duty at regular rates along with VAT. Inputs such as polyster fibre, nylon and other petrochemicals etc suffer excise duty which can be claimed as Cenvat credit.

The GST rates for the textile sector have been notified as under:

S. No.	Type of fibre/filament	GST rate
		Fibre	Yarn	Fabrics*	Garments and made ups**
1.	Silk	Nil	5%	5%	5% / 12%
2.	Wool	Nil	5%	5%	5% / 12%
3.	Cotton	5%	5%	5%	5% / 12%
4.	Other vegetable fibres	Nil / 5%	5%	5%	5% / 12%
5.	Manmade fibres / filaments	18%	18%	5%	5% / 12%

* - 5% GST rate with no refund of unutilized input tax credit.

** - (i) 5% GST rate for garments / made ups of sale value not exceeding ₹ 1000 per piece.

 (ii) 12% GST rate for garments / made ups of sale value exceeding ₹ 1000 per piece.

Thus, the GST rate structure for the Textiles Sector enables ease of classification and determination of rate.

The main demand of the textile traders has been not to put any tax on fabrics. However, the same has not been accepted because of the following reasons:

• Nil GST on fabrics will break the input tax credit chain and then the garments / made ups manufacturers will not be able to get the credit of tax on previous stages
• Nil GST on fabrics will result in zero rating of imported fabrics, while domestic fabrics will continue to bear the burden of input taxes.
• Generally, the GST rates are equal or lower than the pre-GST tax incidence. And therefore, the price of fabrics is not likely to go up.

In fact, during 2003-04, the entire textiles sector was subjected to central excise duty.

Raw jute has been kept at Nil rate of GST, i.e., there will be no tax on raw jute. The bags made of jute are clearly specified in the rate schedule under heading 4202 22 30. The rates for Hand bags and shopping bags of jute is 18%. Raw silk has also been kept at Nil rate of GST, cotton has been ketp in 5% slab.

As per the rate schedule in respect of goods classified under Chapter 61 and 63, all goods of sale value not exceeding ₹ 1000/- per piece would be taxed at 5% and the goods of sale value exceeding ₹ 1000/- per piece would be taxed at 12%. Therefore, it is the sale value i.e. the transaction value on which the tax has to be paid and not the MRP. Rate of tax linked to the sale value applies only to garments and not for sarees and suit lengths which are fabrics.

GST rate on fabric is 5 percent irrespective of composition. Dhoti is classifiable under Chapter 52 or Chapter 54 as fabrics. Old dhoti is classifiable under heading 63.09 as worn clothing. The tax for chapter 63 is similar to apparels and related to sale value whereas cotton fabrics/man-made fabrics, irrespective of value, are taxed at 5%. Whatever be the classification, as presumably the old cotton dhoti would be below the sale value of ₹ 1000/- per piece, it would be taxed at 5%.

Rate on coin mats, mattings and floor coverings falling under Chapter 57 is 5 percent. The rate of 5% would be chargeable on the job process relating to the textile yarns (other than Man Made Fibre/Filament) and fabrics. Sarees are treated as fabrics and a saree remains fabrics only as no new item emerges having distinct name, character and use. Stitching of two or more different kinds of fabrics also does not take away its classification. Therefore, the sarees whether embroidered or not would be taxed at the same rate at which the fabric is taxed.

Embroidery strips/ badges (narrow woven fabrics) are classified under heading 5810 and chargeable to tax at 12%.

Shawls fall in the category of articles of apparel and clothing accessories and are classified under heading 61.17, if knitted or crocheted and under heading 62.14, if not knitted or crocheted. The rate of tax is 5% if the sale value of shawl does not exceed ₹ 1000/- per piece and the rate is 12% if the sale value exceeds ₹ 1000/- per piece.

Dress sets are classified under heading 6307 and the rate of tax on the dress materials/patterns is similar to the apparels i.e. for dress material of sale value not exceeding ₹ 1000/-, tax at 5% would be charged and for dress material of sale value exceeding ₹ 1000/-, tax at 12% would be charged.

GST on Khadi Products

With the exemption to the SSI sector being drastically reduced from the earlier INR 150 lakh to INR 20 lakh, the exemption cover enjoyed by many of the Khadi Institutions (KIs) has been removed. KIs are now mandated to obtain registration under GST and also pay GST on various Khadi products which is 5%.  The products of the Village Industries sector were either taxed @ 0-14.30% before-GST and post-GST the same products attracts tax @ 12-28%.

In pre-GST regime, only Khadi yarn produced in Khadi sector was exempted, while other Khadi products attracted 5% GST.  Ministry of MSME has approached Ministry of Finance to consider the sector for exemption from GST or to ensure a seamless flow of input tax credit in order for Khadi Institutions to claim input tax credit.

Credit Restrictions

Vide Notification No. 5/2017-Central Tax (Rate) dated 28.06.2017, it has been notified that in case of the following items / products, where the credit has accumulated on account of rate of tax on inputs being higher than the rate of on the output supplies of such goods (other than nil rated or fully exempt supplies), no refund of unutilised input tax credit shall be allowed:

S. No.	Tariff item, heading, sub-heading or Chapter	Description of Goods
1.	5007	Woven fabrics of silk or of silk waste
2.	5111 to 5113	Woven fabrics of wool or of animal hair
3.	5208 to 5212	Woven fabrics of cotton
4.	5309 to 5311	Woven fabrics of other vegetable textile fibres, paper yarn
5.	5407, 5408	Woven fabrics of manmade textile materials
6.	5512 to 5516	Woven fabrics of manmade staple fibres
7.	60	Knitted or crocheted fabrics [All goods]

Procurement Planning

Textile sector consists of both organized and unorganized sector where procurement of inputs from unorganized sector is quite common. Similarly, number of small traders are involved who opts for composition scheme. Procurements from these sources shall increase the cost of materials as such suppliers would not be eligible for input tax credit. It is important for manufacturers to plan the procurements from the vendors in GST regime.

Announcement of transitional rates for Remission of State Levies of Garments & Made-ups 

In order to support exporters of garments and made-ups, the Government has announced as a transitional arrangement that for the period 1st July 2017 to 30th September 2017, the exporter may claim Remission of State Levies (ROSL) at the rates prior to introduction of GST.

Conclusion

With the GST, the manufacturing sector will become more competitive. As far as the textile sector, being an essential item for the common man is concerned, textile items are being demanded to be kept under GST with the minimum possible tax slab with the special rates.

The introduction of GST does have some negative impact for the textile industry in general. However, the consolidation of taxes will help create a level-playing field for the bigger textile manufacturers as smaller or unorganized sector will not be able to use some of the earlier practices to keep themselves competitive.