Leather, textiles need a leg up

The textile and leather sectors, with a base in South India, have a competitive advantage in meeting the expectations of the ‘Make in India’ mantra. The vision of the textile sector is to raise exports to $80 billion by 2020. It contributes around 4 per cent to the GDP and is considered the second largest provider of employment, after agriculture.

Leather consistently figures among the top 10 sectors earning foreign exchange. It is one of the sectors identified for the ‘Make in India’ campaign as the export of leather is growing at more than 10 per cent year-on-year and has achieved an export turnover of $4,450 million during the first seven months of the current financial year. In this $6 billion industry, footwear alone accounts for $4 billion.

What do these sectors expect from government? Topping the wish-list would be incentivising exports. With the foreign trade policy expected to be announced shortly, the expectation is to make our exporters competitive by broadening the incentive base and reducing the procedural hassles in obtaining these incentives.

While reports suggest that the commerce ministry will stick to deadlines (the eight-year period set by the WTO’s agreement on subsidies and countervailing measures), restoration of the SHIS (Status Holder Incentive Scheme) scheme would provide the necessary relief in terms of duty concessions. Increase in duty drawback rates would be a welcome move. It is important that processes/documentation for claiming export benefits are simple and time-bound to ensure that no taxes/duties are embedded in the export products.

Considering the employment opportunities in the leather and textile sectors, deduction under income tax law would be welcome. The investment allowance provision would be useful. Rationalising the duty/tax structure is equally important. Companies operating under the Export Oriented Unit (EOU) scheme are realising that the scheme offers no additional incentives comparable to what’s on offer for domestic players in terms of incidence of tax. An exit route from EOU without duty implications would provide relief.

The key expectation is rationalisation of the ‘inverted duty structure’ by exempting the levy of special additional customs duty under Section 3 (5) of the Customs Tariff Act on raw materials. Reduction of Basic Customs Duty from 7.5 per cent to 5 per cent on all textile machinery and spare parts with retrospective effect boost the sector.

The elaborate classification under customs tariff results in inordinate delay in clearance of goods.

Given the size of and the income generated by leather, the thinking in the industry is that the 12 per cent excise duty levied on leather shoes is very high, resulting in high manufacturing costs.

Reducing excise duty to 6 per cent will make the industry competitive. Further, excise duty concessions provided for footwear on MRP up to ₹500 may be increased to ₹1,000.

After the introduction of MAT in special economic zones, development has slowed down. Reinstating the exemption will provide a boost to non-resident investors in the manufacturing goods sector.

Industry is also awaiting the major indirect tax reform, the Goods and Services Tax, which is expected to eliminate multiple taxes and establish a system of seamless credit. By simplifying the current complex indirect tax structure, GST will incentivise Indian manufacturing.

Tax Administration and Reform Commission (TARC) reports have provided several valuable suggestions (after considering the inputs from industry) aimed at creating the right administrative tax environment to incentivise investment and manufacturing. A crucial aspect is a litigious-free environment and approach.

The writer is a partner, Tax & Regulatory Services, EY. EY’s senior tax professional Priya Balasubramanian contributed to the article. The views are personal

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