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What is GST and how will it affect the Garment Industry?

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Page 1: What is GST and how will it affect the Garment Industry?
Page 2: What is GST and how will it affect the Garment Industry?

What is GST?

• Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. GST is levied on these value additions – the monetary worth added at each stage to achieve the final sale to the end customer.

• GST might come as a breather and help with the standardization, simplification and automation of compliance requirements associated with the trading and movement of goods, especially inter-state movement of goods. GST automates most of the compliance requirements (including forms/permits/way bills, etc.), thereby reducing the cost and effort for the industry.

Page 3: What is GST and how will it affect the Garment Industry?

GST in Textile and Apparel Sector

• The textile and apparel sector is a key contributor in Indian economy. Its contribution to the country’s GDP and exports is 6% and 13% respectively.

• The new GST structure will replace the existing indirect taxes with a fixed tax structure for each product category which will vary from 5% to 28%.

• On retail front non-premium brands will be benefitted who generate 80-90% of the sales from products worth less than Rs. 1,000.

• Loyalty of the customers to the brands will be a defining factor for both premium and non-premium brands alike.

Page 4: What is GST and how will it affect the Garment Industry?

Effect on Customers

• GST is poised to bring long-term benefits for consumers. Now, the customers won’t have to pay taxes-on-taxes which will bring down the price for most of the commodities and enhance product availability.

• Besides improving the ease of doing business, GST will also propel the job hiring by about 11% across the sectors.

• GST is one measure that can be a game-changer for the economy as it will not just help in curbing inflation but also the problem of tax-evasion from distributors who currently bear the burden of indirect taxes.

• The benefits will follow the trickle-down effect and help the under-developed states of India. Change in the business world is inevitable and if the fruits are long-lasting then these changes should be embraced.

Page 5: What is GST and how will it affect the Garment Industry?

Challenges Faced by the Indian Textile and Apparel Sector

• The industry veterans say that the tax and tariff policy have created distortions in the Textile and Apparel sector in India which might impede India’s domestic as well as export competitiveness.

• The current tax regime also differentiates by type of fibre (cotton vs man-made fibres), by price (for garments above Rs. 1,000), by type of product (fabrics vs garments) and by branding (branded vs unbranded garments).

• As a result, the supply chain (consisting of ginning, weaving, processing, and garment manufacturing) is fragmented, and individual production units do not have the scale required for competitiveness in domestic or export markets.

• It also creates opportunities for tax avoidance and gives rise to competitive distortions, which in turn creates pressures for further exemptions.

Page 6: What is GST and how will it affect the Garment Industry?

Problems for Non-Integrated textile players

• Under GST, the man-made fibre yarn is taxed at 18%. On the other hand, fabric is taxed at 5%.

• This difference in tax will create a problem for small textile firms which buy yarn to make fabric. The situation however will be much better in the case of integrated textile firms which produce yarn and use it 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.

• 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.

Page 7: What is GST and how will it affect the Garment Industry?

Conclusion

• The revenue neutral rate for the garment industry under GST is high. The tax slab for ready-made garment is 12% which in previous regime was 4-5% VAT and 2% excise in most of the states.

• For the fabric manufacturers, the exemptions and abatement which was there in Excise and VAT is no more available. Therefore, GST has increased the tax rate but it has now allowed to claim the entire input credit.

• Hence, no doubt GST has increased administrative cost for the textile industry but it has tried to improve compliances. This shall automatically lead to higher revenues for any given rate as long as it is excessively high.

Page 8: What is GST and how will it affect the Garment Industry?

For an elaborate insight on the topic, visit www.stitchdiary.com