Application of a standard goods and services tax (GST) of 12 per cent on textiles, as proposed by the Centre, could increase prices of low-end garments by 6 per cent, dent demand, lead to closure of up to 95,000 small units and result in 7-10 lakh job losses, per a study done by textiles body Clothing Manufacturers Association of India (CMAI).

A 5 per cent standard GST, on the other hand, may increase demand for garments priced over ₹1,000 by about 0.5 per cent, reduce its price by about 5 per cent and create additional jobs of about 30,000 to 40,000, the study further pointed out.

Taking the middle path by applying a standard GST of 7-8 per cent on textiles will result in a minor demand volume drop of about 0.5 per cent, not lead to any major closure of units and result in negligible job loss. The government, however, does not have an existing 8 per cent slab for GST.

“The study has been presented to the Finance Ministry. The textile industry has proposed that a status quo on the present GST rates should be maintained and once new slabs are made effective, the industry may be shifted to the 7-8 per cent slab,” said Sanjay Jain, a Delhi-based textile producer.

Inverted duty structure

To correct the existing inverted duty structure, the Central Board of Indirect Taxes and Customs (CBIC) notified an increase in GST rate of various kinds of textiles, apparel and footwear to 12 per cent from 5 per cent earlier (for items priced less than ₹1,000), which will be effective from January 1, 2022.

GST rates for man made fibre has been lowered to 12 per cent from 18 per cent while those on apparel priced over ₹1,000 have been maintained at 12 per cent.

While the move is aimed at bringing in uniformity of rates for the entire textiles sector and removing inverted duty distortions (where inputs are taxed at a higher rate than finished products), textile bodies have said that this would deal a sharp blow to small scale manufacturers of garments already grappling with rising prices of raw materials.

“The Finance Minister listened to the grievances of the textile industry very patiently. But a final decision rests on the GST council,” another textile industry source who attended the meeting with the FM earlier this month said.

West Bengal’s former Finance Minister Amit Mitra, at a recent press briefing, reportedly said that the need to correct the inverted duty structure put forward by the Centre as a pressing reason to justify the rate hike doesn’t hold much merit as only 15 per cent of the textile industry suffers from the anomaly.

Mitra, in a tweet on Sunday, asked Prime Minister Narendra Modi to call an urgent meeting of the GST Council to reverse the decision.

Impact on tax collection

According to the CMAI study, potential tax collection is likely to increase by ₹7,000–8,000 crore if a uniform GST of 12 per cent is adopted for the entire textile chain. Tax collection may fall by about ₹1,500 crore if GST of 5 per cent is adopted instead. In case of a 8 per cent GST on textiles, tax collection can increase by up to ₹2,000 crore.

The study was carried out by holding interviews of multiple stakeholders including large players and MSMEs across the value chain from fiber to retail, according to CMAI.

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