By Vasundhara Sanger
Posted on 22/02/2023
Textiles and garments were among the items included in the list when the new indirect tax, the Goods and Services Tax or GST, was rolled out on July 1, 2017. At the time, the new tax regime garnered a mixed reaction from all businesses. However, the most notable concern to be addressed was the tax anomaly of the inverted duty structure that a section of the textile value chain needed help to cope with.
In simple terms, an inverted duty structure is when taxes on raw materials (inputs) surpass those on the finished goods (output). Manufacturers were concerned about the textile and apparel sector because it thwarted competitiveness and compelled Indian-made products to be more expensive than imported finished products.
Reportedly, textiles add over 2% to the GDP and more than 12% to the manufacturing sector’s GDP. Therefore, noting the apparel industry’s demand, the government raised the GST on finished goods such as garments, footwear and textiles from 5% to 12% and reduced the GST rates for a few synthetic fibres from 18% to 12%, bringing uniformity of rates across the entire textiles sector and discarding inconsistencies in the inverted duty structure. However, the government’s decision yet again elicited conflicting responses from the textile and apparel industry. The manmade fibre (MMF) manufacturers welcomed the decision because the 12% uniform GST (from the earlier 18%) would benefit the sector by saving its working capital, reducing the compliance burden, and correcting the inverted tax structure plaguing the MMF textiles value chain. It would help the entire value chain of the MMF textiles sector as it entailed saving a great deal of working capital, reducing the industry’s compliance burden, and helping resolve the input tax credit residues accumulated because of the inverted tax structure.
Yet, except for the MMF manufacturers, the general sentiment in the industry circle echoed disappointment. The textile and apparel MSMEs that were among the key sectors to register tremendous growth despite the pandemic (which increased the cost of production) were now faced with an added tax burden, the industry felt. Under the pushback pressure from the industry, the government deferred its decision to implement the new rates from January 2022. Still, sooner or later, the GST will be implemented. The standard GST rate as of now for textile products is 12%, while 5% GST is applied if the cost of apparel is less than ₹1,000. No GST is applied on handlooms, and there are more norms depending on HSN codes.
Since the GST rollout more than five years ago, apprehensions from different quarters have been about how it will affect small businesses with poor implementation, compliance issues, alleged harassment by tax officials etc. The nodal body, GST Council, as well as the central and state governments, have addressed industry concerns from time to time and modified rules to make the system convenient.
Notwithstanding, GST has significantly impacted the apparel industry in India. Overall, while GST has brought in several positive changes, it (has) also posed some challenges for businesses in the apparel industry in India.
Positive Impact
Uniform Taxation: GST has replaced multiple indirect taxes with a single tax, making the tax structure more transparent and easier to understand for businesses.
Reduced Tax Burden: GST has reduced the overall tax burden for businesses by lowering cascading taxes and simplifying the tax structure.
Increased Compliance: GST has increased compliance among businesses as it is an online-based system, and all transactions are recorded and tracked.
Boost Exports: For traders registered with GST, barriers like duty drawbacks are eliminated, and Input Tax Credits as well alleviate the process of exports for the exporters.
Negative Impact
Increased Costs: GST has increased the costs for businesses as they are required to comply with the new tax structure and maintain records of all transactions.
Complexities in Refund Process: The refund process under GST can be complicated, leading to delays and increased administrative costs for businesses.
Issues with Input Tax Credit: Businesses may need help in claiming input tax credits due to issues with invoicing, record-keeping, and verification processes.
Challenging for Small Businesses: Many small business owners may need to be more competent with online and electronic mediums. The owners must register for GST across all states where they do their businesses. Irrespective of the turnover, they will not receive exemptions.
Financial Limitations
Much has been written about small businesses suffering under the GST tax regime. Reportedly, most of them do not engage a bookkeeper or an accountant. This is one of the glaring reasons why many small businesses need help to cope with GST compliance. Moreover, usually, large companies delay payments to smaller vendors, pushing them to pay GST from their resources. Even though temporary, it eats into the working capital of the supplying vendors.
Altogether, while there were some challenges to both the government and businesses in the initial days of GST implementation, it can be said that presently, GST has largely enabled the ease of doing business.
Over five years after it was first implemented, GST is undoubtedly here to stay, as its fundamental structure is entrenched in the system.
