Under GST, manmade fibre yarn will be taxed at 18% while its end product, fabric, will be taxed at 5%. Tax differential leaves integrated textile firms which produce yarn and use it to make fabric at an advantage over those which buy yarn to make fabric. Also, cotton made yarn and fabric will attract 5% duty. This imbalance is expected to hit small textile companies which buy manmade yarn to weave fabric.
Since manmade fibres comprise of more than two third of Indian textiles sector, industry bodies fear of mass closing down of small non-integrated players.
In addition, since imported fabric will attract 15% effective duty, cheaper Chinese goods may also pose a serious threat.
Non-integrated textiles players form 80% of India’s textiles industry. The effect of differential duty structure under GST can be understood in the way business is conducted between integrated and non-integrated players. Suppose, 1 kg manmade yarn costs Rs 100. An integrated player (present in more than one segment in textile value chain) would sell the yarn to a non-integrated player at Rs 100, which will attract 18% tax.
After taking into account this tax and value addition of Rs 20, cost of the fabric (final product) will be Rs 138. Considering 5% duty on fabric, the garment maker while purchasing fabric will shell out Rs 145. For an integrated player, cost incurred on selling fabric after taking into account value addition work of`20 would be much less at Rs 126. This will make business for non-integrated textile players unviable.
Sanjay Jain, Managing Director, TT Ltd, said, “Most manufacturers in industry do a single process and hence a lot of job working is involved. GST of 18% on manmade fibre would make the job work segments and their principals uncompetitive against large composite mills. This problem is further accentuated as non-integrated textiles player would not get refund of excess GST on input.”
Pawan Kumar Kaushik, an Indian businessman based in Taiwan and engaged in business of textiles for the past three decades, said, “The levy of 18% on manmade fibre may result in job losses from non-integrated segment. In my assessment, there could be job losses of 10-15 lakh. Competition from Chinese players would intensify.” According to industry estimates, since the Chinese government provides a rebate of 18%, fabric manufactured there would be 20% cheaper when exported to India even after considering 10% import duty and 5% GST on import of fabrics.
This would result in higher competition for Indian fabric and garment manufacturers.