Tax parity needed between cotton and man-made fibres, Smriti Irani to Sitharaman

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Textile minister Smriti Irani has approached finance minister Nirmala Sitharaman seeking her intervention to ensure parity of the goods and services tax (GST) rates between cotton-based and man-made textiles, and undo a historical imbalance in favour of the natural fibre-dominated value chain that has hurt the country’s export prospects. Irani has also pitched for correcting a crippling indirect tax structure in the man-made textiles segment, in which GST rates are high at the raw material stage and the ITC (input tax credit) process takes time, acceding to a long-pending request of the textile industry, sources told FE.

Decisions on GST rates, of course, are being taken by the GST Council that comprise both the Centre and states, either by consensus or majority vote. While the GST on cotton and textiles made of it stands at a uniform 5% across the value chain, the rate for synthetic fibre is 18%. Man-made filament/spun yarn is taxed at 12% and fabrics 5%. This is despite the fact that man-made textiles make up for as much as 65-70% of global demand and consequently hold immense export potential. In India, however, cotton textiles account for around 70% of the market.

Coupled with rigid labour laws and elevated logistics costs, this distortion caused by policy interventions for decades has stunted the country’s ability to raise garment exports exponentially. Earlier this week, textile secretary Ravi Capoor told a gathering of industry executives that while China has “vacated the apparel market worth $20 billion over the past three years”, mostly in the technical textiles segment, India has barely gained, and Vietnam has emerged as the biggest beneficiary. China has been cutting down on its exports in labour-intensive sectors, as it moves up in the global value chain and focusses on hi-tech products.

The latest move comes at a time when outbound shipments of textiles and garments shrank 6.4% year-on-year in the April-January period (even on a favourable base), aiding a decline in overall exports that have contracted for a sixth straight month through January. As such, the labour-intensive sector’s share in the overall merchandise exports has been sliding consistently in recent years, having dropped from as much as 13.7% in FY16 to just 10.6% this fiscal (up to January), the lowest in around a decade.

While a parity in the tax structure for cotton and man-made textiles has long been sought, industry executives are more optimistic about the structural change now, emboldened by the fact that the Budget 2020-21 took a big step by ending an anti-dumping duty on purified terephthalic acid (PTA), which is used for making polyster staple fibre, filament yarn and film. High duty incidence on PTA imports was a cost push across the value chain and was one of the sources of weak pricing power of the downstream synthetic textile industry in export markets. In a recent reply in Parliament, Irani highlighted that uneven GST rates had led to an inverted duty structure in the man-made fibre textile value chain.

Sanjay Jain, former chairman of the Confederation of Indian Textile Industry (CITI), said even though refund of inverted duty is permitted under the GST regime, the process takes time, effectively blocking working capital of companies for months. According to OP Lohia, chairman of Indo Rama Synthetics, the GST should have a uniform rate structure for all fibres and this disparity between natural and man-made fibres must end. When the GST was introduced in 2017, the tax incidence of 18% for man-made fibre was retained (earlier it was 17.5%, including both the excise duty and value-added tax) but it didn’t bridge the gap with the cotton fibre.

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