Textile and Garment industry play a very important role in the development of the Indian economy with respect to GDP, Export promotion, employment, etc. It is the one of the oldest manufacturing industry in India. It is the second largest industry after agriculture which provides skilled and unskilled employment. In this sector, 100% FDI is allowed by the Government under the Automatic Route.
Central Excise Duty was first levied on woven garments in 2001. Subsequently the whole textile Industry was brought under the Excise Duty net by 2003. An option for availment of exemption from payment of Excise Duty was introduced vide Notification no.30/2004 with a condition that any manufacturer availing the option is not eligible for CENVAT credit on inputs and input services.
2. VAT / Sales tax
Most of the states in India have exempted textiles and fabrics from levy of VAT / sales tax. Wherever no exemption has been provided, for small players, the option of paying taxes at concessional rates is also provided under composition scheme in many states
3. Entry tax
In many states, entry tax is levied on specified goods when such 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.
Contract Manufacturing/ Job Work in Garment Industry
It is the usual practice in the readymade garment industry, that the owners of the brand names out source the manufacturing activity completely or on job work basis. In such cases there are some special provisions for the levy of Excise duty. The liability for the payment of duty which usually rests with the job worker as the manufacturer shifts in such cases to the brand name owner and he is required to register and comply with other formalities relating to levy of duty. Alternatively, Brand name owner can authorize his job-worker to obtain registration and pay the duty on goods.
Input Tax Credit Breakup:
As discussed above, the textiles industry comprises of both regular and composition taxpayers. Most of the manufacturers in the industry are in Composition Segment. Numerous transactions in the textiles industry flow from the unorganized to the organized sector and vice versa. Where Regular/Registered Taxpayer purchases goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Cenvat Credit chain. Input Tax credit paid on the previous transaction is included in the cost of the product pushing up the price of the final product..
Small Business Compliance Cost:
Composition scheme Taxpayer is hesitant to join Credit chain as it increases the compliance cost of engaging professional to meet their Tax obligation.
GST IMPACT on Ready-made Garments Industry
The textile industry is characterized by large inter-state movements both in respect of inputs and finished products. It also draws inputs from many other sectors consisting of both goods and services including dyes and chemicals, petroleum products and transport services. There is a large inter-face between organized and unorganized sectors. Given the inter-state and inter-industry movement of goods and services and interdependence of organized and unorganized sectors in the textile industry, the GST will have significant effects on the growth and productivity of the textile sector.
Main Effect: Rate-Revenue Effect
After the application of GST, there will be an increase in the effective tax rate to have a negative impact on the textile sector as compared to current taxation mainly because of current incidence of low tax rate; especially, on cotton value chain; exports however, will not be impacted as it will be zero-rated.
Capital goods scenario
In the current scenario as most of the manufacturers in the textile or readymade garment industry either opt for exemption of tax or for composition scheme without availing the input tax credit, the tax paid on the purchase of capital goods adds on to the purchase cost of the capital goods and recovered over the life of the machinery as depreciation.
In the GST scenario, the taxes paid on purchase and installation of capital asset and equipment can be claimed as Input credit. This will lead to up-gradation and expansion of the Textile Manufacturing Industries with latest Improve technologies.
Present Indirect Taxes Applicable for the Industry
1. Central Excise DutyCentral Excise Duty was first levied on woven garments in 2001. Subsequently the whole textile Industry was brought under the Excise Duty net by 2003. An option for availment of exemption from payment of Excise Duty was introduced vide Notification no.30/2004 with a condition that any manufacturer availing the option is not eligible for CENVAT credit on inputs and input services.
2. VAT / Sales tax
Most of the states in India have exempted textiles and fabrics from levy of VAT / sales tax. Wherever no exemption has been provided, for small players, the option of paying taxes at concessional rates is also provided under composition scheme in many states
3. Entry tax
In many states, entry tax is levied on specified goods when such 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.
Contract Manufacturing/ Job Work in Garment Industry
It is the usual practice in the readymade garment industry, that the owners of the brand names out source the manufacturing activity completely or on job work basis. In such cases there are some special provisions for the levy of Excise duty. The liability for the payment of duty which usually rests with the job worker as the manufacturer shifts in such cases to the brand name owner and he is required to register and comply with other formalities relating to levy of duty. Alternatively, Brand name owner can authorize his job-worker to obtain registration and pay the duty on goods.
Input Tax Credit Breakup:
As discussed above, the textiles industry comprises of both regular and composition taxpayers. Most of the manufacturers in the industry are in Composition Segment. Numerous transactions in the textiles industry flow from the unorganized to the organized sector and vice versa. Where Regular/Registered Taxpayer purchases goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Cenvat Credit chain. Input Tax credit paid on the previous transaction is included in the cost of the product pushing up the price of the final product..
Small Business Compliance Cost:
Composition scheme Taxpayer is hesitant to join Credit chain as it increases the compliance cost of engaging professional to meet their Tax obligation.
GST IMPACT on Ready-made Garments Industry
The textile industry is characterized by large inter-state movements both in respect of inputs and finished products. It also draws inputs from many other sectors consisting of both goods and services including dyes and chemicals, petroleum products and transport services. There is a large inter-face between organized and unorganized sectors. Given the inter-state and inter-industry movement of goods and services and interdependence of organized and unorganized sectors in the textile industry, the GST will have significant effects on the growth and productivity of the textile sector.
Main Effect: Rate-Revenue Effect
After the application of GST, there will be an increase in the effective tax rate to have a negative impact on the textile sector as compared to current taxation mainly because of current incidence of low tax rate; especially, on cotton value chain; exports however, will not be impacted as it will be zero-rated.
Capital goods scenario
In the current scenario as most of the manufacturers in the textile or readymade garment industry either opt for exemption of tax or for composition scheme without availing the input tax credit, the tax paid on the purchase of capital goods adds on to the purchase cost of the capital goods and recovered over the life of the machinery as depreciation.
In the GST scenario, the taxes paid on purchase and installation of capital asset and equipment can be claimed as Input credit. This will lead to up-gradation and expansion of the Textile Manufacturing Industries with latest Improve technologies.
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