High GST on inputs to spoil party for synthetic fabric makers

Exporters await govt's export policy- a move expected to remove anomalies in current GST structure

Textile industry exppressed satisfaction with the proposed goods and services tax (GST) regime as it hails the dawn of fibre-neutrality in the sector. Both fibres have been exempted from the porposed tax structure, while keeping the value chain within the purview of GST. 

Garments makers and even denim companies are mostly relieved as they see no drastic change in prices following GST. Synthetic fabric makers, however, feel the pinch in the wake of a higher input tax being levied on them. 

Exporters are currently awaiting the government's export policy- a move that they feel would remove anomalies present in the existing GST structure.

Many in the industry are not anxious about the two tax slabs under the new tax regime. 

"With the merger of input tax credits and local levies under GST, essential garments selling below Rs 999 will save on total applicable taxes, thereby making them even more affordable. There may be a small increase in tax incidence on garments priced above Rs 1,000 after taking account of all input tax credits. The industry would, however, absorb these and there would be no change in customer selling prices," said Rahul Mehta, President, Clothing Manufacturers Association of India (CMAI).

CMAI is currently working with industry stakeholders to identify challenges in the sector that may call for the need to develop specific rules to allow ease of doing business even as the sector, as a whole, gears up for the roll out of GST from July 1.

But all may not be well for synthetic or manmade textiles.

Sri Narain Aggarwal, Chairman, Synthetic and Rayon Textiles Exports Promotion Council said: "Domestic synthetic fabric makers will be facing higher tax on raw material, apart from the 5 per cent GST levy on the fabric. As a result, there will be a huge accumulated credit of input tax that will compel fabric makers to raise prices. To avoid this, government must refund extra tax paid on inputs. This will be an issue for exporters as their refund claim will also block working capital."

Aggarwal added that the twin factors of higher tax on synthetic yarn and lower tax on fabric, could double imports from China as prices of domestic fabric would rise. At present, India's fabric import from China is estimated to be around Rs 4,000 crore due to cheaper rates. Fabric from China is largely synthetic and cheaper by around 10 per cent.

Denim makers like Nandan Denim Ltd (NDL) are expected to remain more or less neutral to GST as both cotton yarn and fabric are in the five per cent slab. However, on the garmenting front, denim jeans that are priced above Rs 1,000 in the organised market will attract a higher rate. However, industry sources state that instead of a price rise on the retail front, middlemen may be forced to squeeze their margins due to a competitive market.

Not just pure cotton denim but even blends may see a neutral impact. 

"Spandex is embedded in cotton yarn so we don't see any additional incident on that. Further, since a combined excise duty and value added taxes (VAT) on polyester used to carry an incidence of 19 per cent, a GST rate of 18 per cent will by and large have a neutral effect on cotton-polyester blends in denim," said Govind Sharda, president at NDL.

Even in home textiles, players are of the view that a post-GST impact maybe more or less neutral. "Earlier too yarn had an inter-state rate of two per cent. Now a charge has been increased to five per cent under GST. But we don't see it being passed on significantly to consumers," said R S Jalan, managing director of GHCL.

Jalan also added that the industry was waiting for further clarity from the government on export incentives. 

However, according to Sharda, the industry may not see a rush in stock clearance for the domestic and export markets.

"We are required to declare our stock on the first day of GST. A notional credit on the declared stock will be made available to all. Hence, there won't be any need to panic for clearing stock," said Sharda.