Some manufacturers argue that rise in tax rates on low-priced clothing will hit MSMEs

The Textile Ministry has said that removal of inverted duty structure in the Man Made Fibre (MMF) sector with the notification of uniform GST at 12 per cent on MMF yarn, fabrics and apparel, to be effective from January 1 2022, will save working capital and reduce compliance burden leading to growth and creation of jobs.

Some manufacturers, however, say that the decision to implement a uniform GST of 12 per cent on all garments, including items below Rs. 1,000, which used to attract a duty of just 5 per cent, will hit small players.

“The GST on MMF, MMF Yarn and MMF Fabrics were 18 per cent, 12 per cent and 5 per cent respectively. The taxation of inputs at higher rates than finished products created build-up of credits and cascading costs. It further led to accumulation of taxes at various stages of MMF value chain and blockage of crucial working capital for the industry,” a release issued by the Textile Ministry, on Monday, stated.

Though there is a provision in GST law to claim the unutilised input tax credit (ITC) as a refund, there were other complications that resulted in more compliance burden, the release added. “The inverted tax structure caused effective increase in rate of taxation in the sector. The world textiles trade has been moving towards MMF but India was not able to take advantage of the trend as its MMF segment was throttled by inverted tax regime,” it said.

Burden on the poor

Garments above Rs. 1,000 were already attracting 12 per cent GST and it was only the “poor man’s” clothing that was being taxed at 5 per cent, pointed out Sanjay K Jain, Chairman, ICC Textile Committee & Past CITI Chairman.

“So now poor consumers will have to pay 7 per cent extra for their clothing. This adds fuel to the rising inflation. Prices of cotton and yarn have already gone up by 60 per cent last year,” Jain said.

Mainly MSMEs supply low-end garments, Jain pointed out, adding that the rising GST will reduce consumption and demand as that segment is more price elastic and requires more working capital.

“The increase in GST on low value garments (below Rs. 1,000), will put more nails on that struggling segment and hit MSMEs,” he added.

Some other industry players have praised the government’s move of addressing the inverted tax structure that adversely affected the industry.

“Addressing inverted duty structure is an important reform in making GST more progressive and will improve the efficiency in manufacturing. Improving the cost competitiveness in MMF value chain is very crucial for next stage of growth and this decision willhelp towards the same,” said Prabhu Damodharan, Convenor, Indian Texpreneurs Federation, Coimbatore.