The goods and services tax, otherwise known as GST, is an indirect tax on ‘goods and services’, replacing several hidden taxes. Even though countries with GST include Australia, Brazil, Canada, Italy, Vietnam, Singapore, United Kingdom, Monaco, Spain, Nigeria, and South Korea, its implementation in 2017 in India stirred mixed reactions. However, what got the country rejoicing unanimously was the deferment of the GST hike from 5% to 12% on textiles. The textile and garment traders in the industrial hub heaved a sigh of relief, hailing it as a “New Year’s gift”.
Explaining the Proposal
In September 2021, the Central Board of Indirect Taxes and Customs (CBIC), on the recommendation of the GST Council, proposed a hike from 5% to 12% on fabrics and garments from 1st January 2022.
According to a Government notification, all footwear priced under Rs 1000 would be subject to a 12% GST rate. On the other hand, all readymade textiles, with the exception of those made of cotton, were to be subject to a 12% GST rate. Previously, these items were subject to a 5% GST rate.
The proposal aimed to address the issue of the inverted duty structure that a segment of the textile value chain is experiencing. The duty structure is inverted when taxes on inputs and raw materials exceed taxes on the output or the final product. Businesses must pay higher GST rates on raw materials than on finished goods, which the Government later refunds. For many industries, the GST Council has addressed the issue of the inverted duty structure to bring parity in the input of raw materials and output of the final product in taxes.
The Predicted Consequences of the GST Hike
Both the federal and state governments are facing revenue challenges as a result of rising spending needs and the economic impact of the second wave of the Covid-19 pandemic in the first half of the current fiscal year. This tax increase would help the Center, which is facing a revenue shortfall due to recent fuel duty cuts. It would stabilize tax revenues and free up funds for welfare initiatives.
It would also keep states from falling off a fiscal cliff when the central Government’s GST compensation runs out in June of next year.
This decision would have affected the poor very badly, increasing the price of clothing and making buying them more difficult and inaccessible.
The hike would also affect 85% of the industry and nearly 80% of final products. It was also noted that the GST rate for garments worth more than Rs. 1000 was already 12%.
Amit Mitra also said that it would lead to a loss of 15 lakh jobs in main and ancillary units. He added, “The additional 7% GST would lead to the closure of 1 lakh more units. The Center is saying it wants to correct the inverted duty structure because GST on man-made fiber is 18%. But man-made fiber is only 15% of the industry, and the rest is natural fiber.”
Mitra also made the following observations:
- Textile is a Rs. 5.4 lakh crore industry, of which 80-85 comprises natural fiber. It employs over 39 million people.
- In West Bengal, the Metiaburuz cluster produces an annual business of Rs. 20,000 crore. The total tax collection from the entire value chain is Rs. 19000 to 21000 crore.
- The planned hike is expected to generate an additional Rs. 7000 crore in revenue for the Government. This could result in job losses and a significant increase in garment prices, as cotton prices have risen by 70% in the last year.
“The incremental revenue too may not come as a lot of units may close and a lot of small units, which were in informal sectors prior to GST, may go back to the old days,” Mitra added.
The Clothing Manufacturers Association of India conducted a study of their own and concluded that the GST rate changes would result in 700,000 to 1 million direct job losses in the sector.
The Counter Arguments
This declaration naturally led to serious concern, with several politicians and industrialists pleading for discernment of the proposal. Amit Mishra, the Principal Chief Adviser to CM Mamata Banerjee of West Bengal, said, “Center must withdraw proposed GST hike on natural fibers….. Union Finance Minister Nirmala Sitharaman should urgently call a meeting of the GST Council and roll back the proposed GST hike on natural fibers, fabrics, and garments.” The hike naturally would not only affect producers but would also affect consumers.
The Deputy Chief Minister of Delhi, Manish Sisodia, has stated that the Delhi Government will protest the proposed textile tax increase. According to the minister, textile traders are opposed to the increase in GST rates, and their demands are justified, so the Aam Aadmi Party (AAP) Government will pursue them.
Also, the ongoing pandemic has understandably caused the fashion and textile industry to plummet as owning high-end clothes is no more a priority. Darshan Dawar, the President of the Ludhiana Woolen Manufacturers Association and the Knitwear Club, said, “The hike in the GST rate would have proved to be the final nail in the coffin as the sector has already been struggling due to the slump in the market amidst the pandemic. The purchasing capacity of customers has already been reduced, and the sector is relieved with the decision to defer the hike.”
In addition to that, industry bodies also opposed the 5% tax increase, citing higher compliance costs, particularly for the unorganized sector and micro, small, and medium enterprises (MSMEs).
The Final Decision
On 31st December 2021, the 46th meeting of the GST Council was held in the national capital. The meeting was attended by the finance ministers of States and Union Territories and senior officials. At a media briefing, Nirmala Sitharaman, the Union Finance Minister, said that the GST meeting had been called under the “emergency provision” after receiving a letter from Gujarat’s Chief Minister, Anandiben Patel.
Sitharaman, at the briefing, announced, “The GST Council meeting has decided to retain the status quo on the GST rate on textiles at 5% and not raise it to 12%. The issue of the GST rate on textiles will be sent to the Tax Rate Rationalization Committee, which will submit its report by February.”
However, no concrete decision has been made on footwear below Rs. 1000. She added that the GoM or Group of Ministers has been given time till February 2022 to analyze the rate rationalization for textiles. The committee will submit a report on the same in that month, after which the GST Council will meet in March 2022 and take the final call.
The meeting is extremely crucial as it is taking place ahead of the Union Budget for 2022-23, scheduled for 1st February 2022, in the Parliament.
The long-term benefits of this decision include:
- Elimination of the cascading effects of increased taxes
- It will create a higher threshold for registration leading to a larger turnover to be reached to pay VAT.
- Smaller businesses will benefit from the utilization of the Composition Scheme.
- It will promote digitization.
- There will be a lesser number of compliances as there will be only one unified return to be filed.
- It will promote e-commerce and, in return, better inter-state movement of goods.
- Regulation in the unorganized sector will be easier and safer via online payments and credit systems.
With the plethora of effects of demonetization and Covid-19, digitization will be the norm in the coming years, causing a colossal shift to a digital economy tax regime. This will have a big impact on the way India levies taxes on offshore digital economy firms having a customer base here, which has also become a major concern for such overseas entities.
Due to recent emphasis on matching tax returns in order to claim ITC under GST, tax authorities will be focusing more on data analytics and enforcement of compliance, tax administration, information gathering from third parties, and improving the tax administration process.
IT tools have helped tax authorities identify tax evasion by detecting fake invoices, so technology-based tax administration will gain more importance in the next year.
To conclude, it is apt to say that this proposal not only irked industrialists and workers but also disappointed many common citizens. Several industrialists have called out the Government for causing ramified stress and concern. However, the implementation of this has been stalled. This has definitely relieved several. As mentioned, the hike would’ve had serious shortcomings, especially for the employment sector and low-income groups. The GST council has been receiving blessings and votes of gratitude, and rightly so. The country has definitely entered the new year with a sweet taste.
Written by: Samiksha