The textile industry is watching to see what the final rate of tax under the proposed goods and service tax (GST) regime would be.

This is because of the tax implications the new law will have on major input goods going into the textile production process such as cotton and man-made fibres.

According to a report by financial analysis firm ICRA, a lower 12 per cent rate, as recommended by the Arvind Subramanian committee last year, is likely to have a negative impact on the textile sector, especially affecting cotton value chain. Currently, cotton attracts zero central excise duty under the optional route.

Compared to this, man-made fibre attracts excise duty at the manufacturing stage. Hence there is an incentive for the downstream players in manmade sector to avail of the input tax credit (ITC).

With an optional duty structure at the cotton yarn stage itself, the downstream sectors — weaving, processing and garments — also operate under the optional route.

Anil Gupta, Vice-President, corporate sector ratings at ICRA said, “This is reflected in the less than one per cent effective excise duty rate applicable to 480 spinning and weaving companies rated by ICRA, which accounted for Rs 57,000-crore revenue during FY15.”

On the positive side, under GST, textile players oriented towards domestic markets will be able to avail ITC on domestic capital goods but not the import duty as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets.

Source: Business Standard