The Hindu Business Line : Rupee-hit textile industry in need of incentives to exports

The Indian textile industries are currently in spotlight. The focus, the action and the consequential issues - commercial, regulatory and taxes are certainly more tilted, both quantitatively and qualitatively towards the global markets. This was echoed by the Prime Minister in his speech rendered in the Tex Summit 2007 when he called the players in the industry catering only to domestic market as short sighted.

Indian textile industry has certain inherited unique features such as a fragmented set up, absence of economies of scales, several layers of stakeholders, outdated technology, and geographically dispersed set up. These features result in not only cost inefficiencies, but also in tax inefficiencies at several levels due to cascading taxes in the form of Central Sales tax and local taxes.

Since 2005, after the dismantling of multi fibre Agreement, the Indian textile industry is undergoing a complete reorientation. The textile industry is pitted against players from China and other countries both on quality and cost. Year 2007 exposed the textile industry to the vagaries of forex losses - appreciating rupee against the US dollar. If media reports are to be believed, the hardening rupee pulled down the industry’s exports by 15 per cent last year.

Though the Government has been working out several measures such as putting in place modified Textile Upgradation Fund and concessional pre-shipment and post-shipment credits, on the tax side, the minimum the industry wants is a mechanism to ensure that there are no embedded indirect taxes on its exports. Of course, being one of the few industries, with least imports (a net foreign exchange gainer for the country), the industry would also want incentives for the exports.

One of the demands of the industry for this Budget is a scheme to recoup some of the local taxes such as Octroi and Central sales tax, for which understandably currently there are no mechanism. In terms of rate, the demand is pegged to be equivalent to 6 per cent of f.o.b. value of exports.

EOU scheme

Companies operating under EoU scheme are realising that globalisation has made the scheme irrelevant, especially, with no imports and differential excise duty implication for domestic clearances. An exit route from EoU without duty implication on the de-bonded assets would provide the much needed relief.

Specifically, the demand of the industry is for reduction of import duty relating to man made staple fibres and filaments, cotton, furnace oil and machinery is well founded. Similarly on the excise duty on the input side, they would want cut in duty rates for machinery, man made fibre, furnace oil, etc.

Few key areas that would require special attention of the Finance Minister is relating to past accumulated Cenvat credit and mechanism to eliminate the cost of Special Additional duty of 4 per cent arising out of ineligibility of these units to avail credit, since majority of them opt for zero duty regime.

comprehensive scheme

A well thought out comprehensive scheme in the lines of special economic zone (SEZ) scheme for textile exporters with mechanism to procure inputs, capital goods without duty and input services without service tax and without any geographical restriction on location for its entire gamut of operations should help. In the alternative, there should be well laid out export incentive plan with long term focus and robust structure to frequently update for new levies and taxes should be put in place.

Service tax, for one, like on immovable properties, job work charges and commission paid to agents would certainly add to the cost of products of this industry, unless fully factored in the scheme of incentives or is exempted for exports. Currently, only about ten services are exempted for exports.

Though favourable tax proposals alone would not be sufficient to propel this industry fully into the international orbit, however, this would at least put the industry in the right direction towards success.

(The author is Associate Director – Tax, Ernst & Young)

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