A

Project Study Report

on
Impact of GST on Textile Industry

Submitted in Partial Fulfillment for the Degree of

Bachelor of Business Administration

S.S. JAIN SUBODH P.G. COLLEGE JAIPUR

(2017-18)

SUBMITTED BY SUBMITTED TO

Kshitij vijay Dr. Shailesh Mathur

B.B.A. IV Sem. Assistant Professor

 CERTIFICATE

Certified that this project report entitled Impact of GST in

Textile Industry is a record of project work done independently
by Mr. Kshitij Vijay under my guidance and supervision and that
it has not previously formed the basis for the award of any degree,
fellowship or associate ship to him.

Dr. Shailesh Mathur

Assistant Professor

S.S. Jain Subodh P.G. College

Jaipur

i
 DECLARATION

I hereby declare that this project report entitled Impact of GST

on Textile Industry is a bonafide record of work done by me and
it has not previously formed the basis for the award to me for any
degree/diploma, associate ship, fellowship or other similar title of
any other institute/society.

Kshitij Vijay

S.S. Jain Subodh P.G.College

Jaipur

ii
 ACKNOWLEDGEMENT

It is not often in life that you get a chance of appreciating and expressing
your feelings in black and white to thank the people who have been a
crucial part of your successes, your accomplishments, and your being what
you are today. I take this opportunity to first of all thank the Faculty at S.S.
Jain Subodh P.G.College, especially Dr. K.B.Sharma, Principal, and Dr.
Rita Jain for inculcating and instilling in me the knowledge, learning, will-
power, values and the competitiveness and professionalism required by me
as a management student.

I would like to give special thanks to Dr. Shailesh Mathur for educating me
silver lining in every dark cloud. His enduring efforts, guidance, patience
and enthusiasm have given a sense of direction and purposefulness to this
project and ultimately made it a success.

Last but not the least; I would like to thank my family: my parents, for
supporting me spiritually throughout my life.

The errors and inconsistencies remain my own.

Kshitij Vijay

iii
 Index
S.no Particulars Page no.
Chapter 1 Introduction of GST in India 1
Chapter 2 Profile of the Company 11
Chapter 3 Research methodology of Study 14
3.1 Statement of problem 14

3.2 Objective of study 14

3.3 Data collection 15

3.4 Importance of the study 15

3.5 Limitation of the study 15

Chapter 4 Data analysis and Interpretation 16

4.1 Data classification 16

4.2 Analysis 25

4.3 Interpretation 31

Chapter 5 Summary of findings 33

5.1 Conclusion 33

5.2 Research findings and recommendations 38

Appendices References 39

iv
 List of Figures

Figure 1 Indian textile market share .................................................... 11

Figure 2 India's Textile Market size (ASA & Associates, 2016) ........ 12

Figure 3 Share of Final Consumption Expenditure on Textiles in

Total Private Final Consumption Expenditure ................................... 16

Figure 4 Textile Value Chain: Typical All-Segment Pattern ............. 21

Figure 5 VAT and Sales Tax structure in India .................................. 30

Figure 6 Productivity improving Channels of GST ............................ 34

v
 List of Tables

Table 1 Rate of GST in different countries ............................................ 1

Table 2 GST structure to be in India ...................................................... 5

Table 3 Production of Spun yarn, Filament Yarn and Fabric ........... 17

Table 4 Final Consumption Expenditure on Textiles (Clothing and

Furnishing) in 2011-12 ........................................................................... 19

Table 5 Inputs to Textile Products: Relative Shares of Textile and

non-Textile Inputs................................................................................... 22

Table 6 Textile Inputs for Textile Products: Relative Share of Inputs

in Total Inputs ......................................................................................... 22

Table 7 Revenue Neutral Rates: Textile Sector (Reference Year:

2014-15) .................................................................................................... 23

Table 8 Estimation of Revenue Neutral Rates ..................................... 24

Table 9Net effect on demand due to a shift to GST from the current
indirect tax structure .............................................................................. 26

Table 10 Estimated share of textile segments in tax base ................... 28

Table 11 GST Tax incentive rates ......................................................... 28

vi
CHAPTER 1
1.1 Goods and Service Tax:

Goods and services tax is an indirect tax. This tax is levied on manufacture, sale and
consumption of goods and services in India. This tax will replace the tax collected by
the central and state governments. GST collected during the purchase or sale of goods
is independent of the state where the purchase or sale takes place. This tax structure is
proposed by The GST Bill or The Constitution (One Hundred and Twenty Second
Amendment)

The tax rate under GST would be lower, however, there would be an increase in the
number of assesses. The increased number of assesses is expected to make up for the
reduced tax and the overall tax collection is expected to increase.

Some of the best GST systems across the world like Singapore and New Zealand use
single GST, but India has opted for a dual GST model. The change in tax structure is
expected to have a huge impact in supply chain in India. A comparison of GST rates of
some countries with the proposed India GST rate is given below Table 1 Rate of GST
in different countries

Table 1 Rate of GST in different countries

COUNTRY RATE OF GST

AUSTRALIA 10%
CANADA 5%
NEW ZEALAND 15%
SINGAPORE 7%
MALAYSIA 6%
SWEDEN 25%
INDIA 27%
( Royal Malaysian Customs Department, 2014)

1.2 GST Before and After

Let us consider the example of a manufacturing company in Chennai, which moves its
goods to New Delhi. The actual sale happens in New Delhi and the finished goods have
to be transported from Chennai to New Delhi across different states. As per the current
taxation norms, one has to pay Central Sales Tax (CST) when moving a good to another
state and selling it in the other state. However, if the good is moved for stocking and

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not for sale, then CST need not be paid.

So many companies in order to avoid paying CST, they show this movement as moving
to stock and not moving to sell. To do this, companies have warehouses in every state
where the finish goods are stored and then the goods are transported for sale from the
warehouse in each state.

Let us consider another example of a city called Hosur in Tamil Nadu which is
approximately 30km from Bangalore. Shipping the goods from Bangalore warehouse
to Hosur requires the company to pay CST as Hosur in Tamil Nadu and Bangalore is
in Karnataka. So the companies ship goods from Chennai warehouse, which is
approximately 250km to Hosur to avoid CST.

With the implementation of GST, the companies will be free to setup their own
warehouses to optimize cost and improve customer service.

The following central and state taxes are integrated into GST.

Central Government State Government

 Excise duty  State Excise

 Service tax  Luxury Tax
 CVD  Entertainment Tax
 CST  Entry Tax
 Various Cess
 Additional Customs Duty

1.3 Main Advantages of GST

As the Rajya Sabha prepares to pass the constitutional amendment paving the way for
the goods and services tax (GST), The reform is expected to bump up GDP by about a
percentage point or even more.
Here’s a look at GST’s benefits

 Life gets simpler

GST will replace 17 indirect tax levies and compliance costs will fall.

 Revenue will get boost

Evasion set to drop - Input tax credit will encourage suppliers to pay taxes - States and
Centre will have dual oversight - The number of tax-exempt goods will decline.

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  A common market
It's currently fragmented along state lines, pushing costs up 20-30%

 Logistics, Inventory costs will fall

Checks at state borders slow movement of trucks. In India, they travel 280 km a day??
compared with 800 km in the US

 Investment boost
For many capital goods, input tax credit is not available. Full input tax credit under GST
will mean a 12-14% drop in the cost of capital goods. Expected: A 6% rise in capital
goods investment, 2% overall.

 Make in India
Manufacturing will get more competitive as GST addresses cascading of tax, inter-state
tax, high logistics costs and fragmented market b) Increased protection from imports as
GST provides for appropriate countervailing duty.

 Less developed states get a lift

The current 2% inter-state levy means production is kept within a state. Under the GST
national market, this can be dispersed, creating opportunities for others

 Manufacture goods could become cheaper Lower Logistics

and Tax costs.
All the Products where multiple taxes where applicable will be cheaper like excise duty
and vat both will come to about 30% of Tax but in GST it is assumed to be 18-20%.

 Freeing up online
State restrictions and levies have complicated ecommerce. Some sellers do not even
ship to particular states. All this will end with GST.

1.4 Features of GST will be in India

 Who would be Impacted

All businesses, whether engaged in sales / supply of goods or supply of services, would
be impacted by GST. The impact would be on supply chains, ERP, product pricing,
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dealer margins etc.

 Applicability to service providers

Unlike the transition from the sales tax regime to the VAT, where only businesses
dealing in goods were affected, in the case of GST, as the name suggests, both goods
and service providers will be impacted. Thus, even pure service providers need to plan
for the transition to the GST.

 Time to plan for GST

The draft laws will clarify finer aspects of GST such as rates, classification and
compliances. However, based on the material in the public domain, one can begin with
spreading awareness among various stakeholders within the organization and
identifying broad areas of action before the draft laws are published. Experience of
VAT implementation suggests that there may not be enough lead-time available
between the date of announcement of GST implementation and the actual date of GST
implementation.

 Taxable event
The Taxable event will be the supply of goods and the supply of services. Hence, the
current taxable events such as ‘manufacture of goods’, sale of goods’ and ‘ rendition
of services’ will not be relevant under the GST regime.

 Applicability of both CGST and SGST for all transactions

A transaction of ‘supply of goods’ will attract both the CGST and SGST as applicable
on goods. Similarly, a ‘supply of service’ will attract both the CGST and SGST as
applicable on services.

 Applicability of other Indirect Taxes

It is proposed that the taxes to be subsumed under CGST will include Central Excise
Duty (CENVAT), Service Tax and Additional Duties of Customs and the taxes to be
subsumed under the SGST will include Value Added Tax, Central Sales Tax, Purchase
Tax, Entertainment Tax, Luxury Tax, Octroi, Lottery Taxes, Electricity Duty and State
surcharges relating to supply of goods and services.

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 Table 2 GST structure to be in India
(Office of Textile Commissioner, 2016; Ministry of finance commision, 2015)

Empowered Committee 13th Finance Current Discussions

(Earlier) Commission
SGST CGS T: 5 percent CGST (goods and services): 8%

For Goods SGST: 7 percent SGST (goods): Lower 6%

2 Rate Structure Stated as the target. SGST (goods): Higher 10%

Lower rate: 4-5 percent SGST (services): 8% Plus bands

in each case.
Core rate: 8-10 percent

Services: one rate

8-10 percent

 GST collection model

GST is collected on the value added at each stage of sale or purchase in the supply
chain. The tax on value addition is ensured through a tax credit mechanism throughout
the supply chain. GST paid on the procurement of goods and services is available for
set-off against the GST payable on the supply of goods or services. The idea is that the
final consumer will bear the GST charged to him by the last person in the supply chain.
It is thus a consumption based indirect tax.

 Applicability of Taxes on Import goods

It must be understood that customs duties will remain outside the GST regime. Thus,
the applicable basic customs duty will continue to be leviable on import of goods. In
addition, both the CGST and the SGST are expected to be levied on imports of goods.
Thus, the additional duty of customs in lieu of excise (CVD) and the additional duty of
customs in lieu of sales tax / VAT will both be subsumed in the import GST.

 Taxes on import of services and person liable to pay

Importation of services will be taxed and both the CGST and the SGST will apply on
such imports. The tax will be payable on a reverse charge mechanism and the importer
of services will hence need to self-declare and pay the tax. As to which State will have
authority to collect the relevant SGST, this will be determined based on the place of
supply rules that the government is expected to notify for this purpose.

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  Separate enactments for the Central and State GST
There will be separate enactments. The CGST will be a common code throughout India.
Further, each State will legislate its own enactment to levy and collect the SGST.
However, it is understood that a white paper will be released by the Federal
Government/Empowered Committee of State Finance Ministers based on which each
State will legislate. The expectation is therefore is that a majority of the provisions will
be uniform across the States.

 Expected aggregate rate of GST

The aggregate rate of GST, across the Central and State GST, is expected to be
approximately 16%. This is currently the subject matter of discussion within the
Empowered Committee.

 Different rates for goods and for services

It is expected that there will be one single rate of GST on services at the Central and
State level and the understanding is that there would be not one but a few rates of
Central and State GST for goods.

 Refund of un-utilized cc on inputs and input services

It is envisaged that under the proposed Dual GST model there would be refund of
unutilized accumulated CCs at the end of each fiscal year and that refunds would not
be restricted only to those relating to exports.

 Cross utilization of credits between goods and services

Under the GST regime, the incidence of tax will be on supplies, be it supplies of goods
or services. The taxes will be levied in parallel by the Centre and the States who will
levy the CGST and SGST respectively on each supply of goods/services. Accordingly,
the cross utilization of credits for goods and services would be allowed subject to the
fact that cross utilization of credits between the CGST and SGST would not be
permissible.

 Exemption from GST, lists of exempted goods and services

Under the GST, exemptions are expected to be minimal. Further, a common list of
exemptions for both the Central and State GST with little flexibility for States to deviate
there from is envisaged.

 Benefits availed presently by EOU’s

exemption from excise duty and Central Sales Tax (CST) on domestic procurement of
goods. CST will be phased out and will have no place in the GST regime. It is expected
that the benefits presently availed by the EOUs by way of exemptions would continue

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to be available in the GST regime as well.

 Continuation of exemption currently available

In view of the fact that under the GST scheme, exemptions would be minimal, it may
not be correct to proceed on the assumption that the present exemptions would continue
under the GST dispensation.

 Treatment of Stock transfers

The taxable event will be the supply of goods and therefore the stock transfers could be
taxed. However, certainty will only emerge once the GST law is finalized.

 Process of assessment under dual GST

The dual GST is expected to be a self-assessed tax. The Tax administration would have
powers to audit and re-assess the taxpayers on a selective basis.

 Single return or multiple return

It is expected that a single return will be required to be prepared by the assesse and
copies filed with the Central GST and State GST authorities. The draft GST laws /
Rules will provide further details.

1.5 GST – Challenges for Success in India

GST will be the biggest reform in Indian taxation since 1947, but there are many
challenges for its successful implementation. These are as under: -

 Passing of Bill in Raja Sabha: Since Central Government is not having

sufficient majority in the Raja Sabha. Thus, it will have to ensure safe passage
as it will not be cake-walk for the Union government to pass the Bill in the
Upper House of Parliament.

 Consent of States: For implementing it is critical that GST bill is passed by

the respective state Governments in state assemblies so as to bring majority.
This is a herculean task.

 Revenue Neutral Rate (RNR): It is one of Prominent Factor for its success.
We know that in GST regime, the government revenue would not be the same
as compared to the current system. Hence, through RNR Government is to
ensure that its revenue remains the same despite of giving tax credits.

 Threshold Limit in GST: While achieving broad based tax structure under
GST, both empowered committee and Central Government must ensure that

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 lowering of threshold limit should not be a “taxing” burden on small
businessmen in the country.

 Robust IT Network: Government has already incorporated Goods and

service tax network (GSTN). GSTN has to develop GST portal which ensure
technology support for registration, return filing, tax payments, IGST
settlements etc. Thus, there should be a robust IT backbone.

 Extensive Training to Tax Administration Staff: GST is absolutely

different from existing system. It, therefore, requires that tax administration
staff at both Centre and state to be trained properly in terms of concept,
legislation and Procedure.

 Additional Levy on GST: The Purpose of additional Levy is to compensate

states for loss of revenue while moving to GST. We acknowledge that
fundamental purpose of GST is to make “INDIA” as one state where inter-
state movement of goods is common. In this situation, it would defeat the
very purpose of GST in the country.

1.6 Textile Industry and GST

Taxation of textile sector is opaque and non-neutral across its various segments. Many
textile outputs are either exempt under the central and state tax regimes or are subjected
to relatively low tax rates. Most of the indirect taxes fall on inputs, both goods and
services, and therefore remain hidden, if un-rebated. On the whole, the textile sector is
lightly taxed and extensively subsidized. Textile exports are supported through
payments of un-rebated taxes on textile inputs and other subsidies. Textile units have
historically enjoyed exemptions given to small industries.

The textile industry consists of a large number of small enterprises and a small number
of large enterprises where the organized and unorganized sectors integrally coexist. The
share of the decentralized sector has been increasing in recent years as compared to the
mill sector.

Taxation of the textile sector will be significantly recast with the implementation of the
Goods and Services tax (GST). The GST is expected to replace a number of existing
central and state taxes. The important taxes that may be subsumed in GST are:
Central taxes: Central excise duty, Service tax, Additional Customs duty, Special
Additional Duty, surcharges and cesses.

State taxes: Sales tax/VAT, Central Sales Tax, Purchase tax, Entry tax, and state
cesses and surcharges.

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The final design of the GST and the related constitutional amendments are
yet to be finalized. The impact of GST on the textile sector will be quite significant but
it will differ according to the design of the GST and the GST rates.

This study examines the implications of GST for the textile industry. It estimates the
revenue neutral rates for the relevant textile segments under the GST and highlights the
implications of GST for the growth, employment and export potential of the industry.
It also highlights changes required in the subsidy and support policies of the
government as and when the GST regime replaces the current regime of indirect taxes.
The terms of reference under which the study was commissioned have been listed in
Annex 12.

The textile industry is characterized by large inter-state movements both in respect of

inputs and finished products. It also draws inputs from many other sectors consisting
of both goods and services including dyes and chemicals, petroleum products and
transport services. There is a large inter-face between organized and unorganized
sectors. Given the inter-state and inter-industry movement of goods and services and
interdependence of organized and unorganized sectors in the textile industry, the GST
will have significant effects on the growth and productivity of the textile sector.

With the introduction of GST, several important questions arise. The rates at which the
GST will be levied, consisting of the CGST, SGST and IGST rates, are likely to be
different from the ‘revenue neutral rates’ with respect to the CENVAT rate and Service
tax rate and State VAT rates along with the additional and special excise duties and
cesses and surcharges. Some of the important issues that need to be analysed are
indicated below:

 Will this impose an extra burden on the textile sector? How will the tax
expenditures with respect to the textile sector and other subsidy schemes of the
central government and state governments be affected?

 How can these be redesigned?

 Under GST since the input tax credit chain will be completed, to what extent
will it benefit the industry?

 Will ceteris paribus, employment, output and productivity in the textile sector
improve as a result of GST?

 What are the channels through which the benefits will accrue to the industy

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CHAPTER 2
Profile of Textile Industry in India
2.1 Overview of Textile Industry

2.1.1 Background

India is the one of the world's largest producers of textiles and garments. Abundant
availability of raw materials such as cotton, wool, silk and jute as well as skilled workforce
have made the country a sourcing hub. It is the world's second largest producer of textiles
and garments. The Indian textiles industry accounts for about 24% of the world's spindle
capacity and eight per cent of global capacity. The potential size of the Indian textiles and
apparel industry is expected to reach US$ 223 billion by 2021.

The textiles industry has made a major contribution to the national economy in terms of
direct and indirect employment generation and net foreign exchange
earnings. The sector contributes about 14% to industrial production, India’s Textile Market Share ($
4% to the gross Billion)

domestic product (GDP), and 27% to the country's foreign exchange

31%
inflows. It provides direct employment to over 45
million people. The textiles sector is the second largest provider
of employment after agriculture. Thus, the growth and all round
development of this industry has a direct bearing on the improvement 69 %
of India's economy.
Textile Apparel
India has overtaken Italy, Germany and Bangladesh to emerge as the
world's second largest textile exporter. India's share in Global Textiles Figure 1 Indian textile
increased by 17.5% in 2013 compared to 2012. Textiles exports from market share
India will touch US$ 300 billion by the year 2024-25. (ASA & Associates, 2016)

In 2016, apparel had a share of 69 per cent of the overall market; textiles contributed the
remaining 31 per cent.

2.1.2 Various Categories

Indian textile industry can be divided into several segments, some of which can be listed
as below:

 Cotton – Second largest cotton and cellulosic fibers producing country in the world.

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  Silk – India is the second largest producer of silk and contributes
about 18% to the total world raw silk production.

 Wool –India has 3rd largest sheep population in the world, having 6.15 crores
sheep, producing 45 million kg of raw wool, and accounting for 3.1% of total world
wool production. India ranks 6th amongst clean wool producer countries and 9th
amongst greasy wool producers.

 Man-Made Fibers- the fourth largest in synthetic fibers/yarns globally.

 Jute – India is the largest producer and second largest exporter of the jute goods.

2.1.3 Market size

The Indian textiles industry,

currently estimated at around US

$108 billion, is expected to reach

US $ 141 billion by 2021. The
industry is the second largest
employer after agriculture,
providing direct employment to
over 45 million and 60 million
people indirectly. The Indian
Textile Industry contributes
Figure 2 India's Textile Market size
approximately 5% to GDP, and
(ASA & Associates, 2016)
14% to overall Index of Industrial
Production (IIP).
The Indian textile industry has the potential to grow five-fold over the next ten years to
touch

US$ 500 billion mark on the back of growing demand for polyester fabric. The US$
500 billion market figure consists of domestic sales of US$ 315 billion and exports of
US$ 185 billion. The current industry size comprises domestic market of US$ 68 billion
and exports of US$ 40 billion.

Apparel exports from India have registered a growth of 17.6% in the period April -
September 2014 over the same period in the previous financial year.

2.2 Global vs Domestic Scenario

The global trade of textile and garments was approximately $781 billion in 2015.
This is almost 4.6 per cent of the trade of all commodities, which is estimated at

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approximately $17 trillion. From 2014 to 2015, the global textile and
garment trade has grown at a CAGR of 4 per cent.

The current global garment market is estimated at approximately $1.15 trillion which form
nearly 1.8 per cent of the world GDP. Almost 75% of this market is concentrated in Europe,
USA, China and Japan. An analysis of per capita spend on garment in various countries
shows a significant difference between numbers in developed and developing economies.
Within the major markets, India has the lowest per capita spend on garment ($37) which is
only 3 per cent of the highest one viz. Australia ($1,131).

The top five textile and garment exporting nations are China, India, Italy, Germany and
Turkey. China is the single largest exporter with 39 per cent share while India stood at a
distant second place with 5 per cent share.

The top five textile and garment importing nations are US, China, Germany, Japan and
United Kingdom. USA is the largest importer with a share of 17 per cent of the total global
trade. The Indian textile and garment industry has an important presence in the country's
economy through

The Indian domestic consumption of textile and garment is valued at US$ 63 billion in
2015. Within this, garment retail has the highest share of 73 per cent contributing $46
billion, technical textile contributes $13 billion with a share of 21 per cent and home textiles
contribute $4 billion with a 6 per cent share.

In 2013, India became second largest exporter of textile & garment in the world surpassing
Italy and Germany. India exported textile and garment goods worth $40 billion, with a
share of about 5 per cent of global textile and garment trade. In terms of value, Indian
textile and garment exports is dominated by garment category which has a majority share
of 40 per cent followed by yarn, fabrics, fiber, made-ups and other textiles including
carpets, nonwovens, etc.

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 CHAPTER 3
Research Methodology of Study

3.1 Statement of Problem

3.2 Objective of Study
3.3 Data collection
3.4 Importance of the study
3.5 Limitation of the study
 3.1 Statement of Problem

Indirect tax reforms have been an integral part of the liberalization process since 1991.
In the first phase, India has been steadily attempting to move towards a tax structure that
is simple, moderate, rational and easy to administer and comply with. At the central
level, the move has been to bring down the tariffs – both excise and customs, reduce the
number of rates, correct anomalies, get rid of the complexities in the system and on the
whole, reduce the interface with the government. In addition to indirect taxes levied by
the center, states are empowered to levy certain indirect taxes and sales tax forms major
part of revenue for almost all states for textiles. There was wide variation in sales tax
rates of the same textile commodity in different states. In the existing sales tax structure,
there are problems of double taxation of commodities and multiplicity of taxes, resulting
in a cascading tax burden. The viable solution found was to shift to estimations based
GST i.e. Goods and Sales Tax.

Goods and Sales Tax is one of the most radical reforms that have been proposed for the
Indian economy after years of political and economic debate. Revenue growth will be the
most important aspect by which to judge the success of GST in India in general. To measure
the impact of GST over VAT and sales tax, it is essential to study the various manufacturing
sectors and the impact on the profitability of the sectors like Textile Industry since the
introduction of GST.

3.2 Objectives of Study

1. To understand the key issues involved in the successful implementation of GST on

textile Industry.

2. To study the impact of GST on the Textile Industry.

3. To identify the drivers for the smooth implementation of Tax from VAT to GST.

4. To study the impact of GST over Sales tax, VAT on the price of product.

5. To study the impact of GST over Sales tax, VAT on Government Revenue.

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 3.3 Data collection
GST is one of the most radical reforms that have been proposed for the Indian
economy after years of political and economic debate. Revenue growth will be the
most important aspect by which to judge the success of GST in India in general.
The idea to carry out this research study is to measure the impact of sales tax value
added tax and goods and service tax on profitability of Textile Industry in India.
The present study is partly descriptive and partly explorative.

The data for this study is obtained from secondary sources.

Secondary Data:
Secondary data were collected from referred books, reports, and conference papers,
referred journals, magazines/periodicals, ministry of finance (Economic Survey) Govt. of
India ministry of Textiles and, EU education. In the present study, following statistical
tools were used for analysis of data, simple tabular and percentage method is applied and
estimation of annual compound growth rate. Moreover, standard statistical estimation is
used to calculate the linear regression and test to test the hypothesis of the research study.

3.4 Importance of the Study

The objective of the study of this topic is to find out the impact of Goods and
Service tax on Textile Industry and to determine which tax system is beneficial to
such Industries, Consumers and also to find out the effect of Sales tax, Value Added
Tax from Goods and service tax on the Price of the certain product. This study also
results in finding the most beneficial system of tax structure which is suitable means
less complicated from the view point of Government and Industries. This study will
be useful to traders; manufacturers to analyze its tax burden, at the same time the
government will also understand how to generate the revenue through indirect taxes
in the Country.

3.5 Limitations of the Study

The data collected for this research is collected from the Internet which is based on
assumptions and levies variability by Experts. The result received from this research
may or may not be suitable and precise application for future GST Aspect

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 CHAPTER 4
Analysis and Interpretation

4.1 Data classification

4.2 Analysis
4.3 Interpretation
 4.1 Data Classification
The data collected will be thoroughly analyzed to find the impact of GST tax base on textile
industry. And to further Interpret to find out the key points of Impact of GST on such
Industry to the raw materials to Final products and previous tax structure.

4.1.1 Share of Textile in Potential GST tax base

We look at the pattern of consumption expenditure on textiles over time and

across states. The former is based on the National Income Accounts data and the
latter has been estimated using data from the National Sample Survey
Organization. The final consumption expenditure on textiles in India was Rs.
3,49,647 crore in the year 2011-12. As indicate Figure 3 the share of private
final consumption expenditure on clothing and furnishing in the total private
final consumption expenditure has been falling over time. At its peak, this share
was about 32 percent in the mid-fifties. By 2011-12, this share has fallen to about
17 percent. It appears to be stabilizing around this level. This is still a large part
of the tax base for GST.

Figure 3 Share of Final Consumption Expenditure on Textiles in Total Private Final

Consumption Expenditure

16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2010-11
2004-05
2006-07
2008-09

2012-13
1996-97
1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95

1998-99
2000-01
2002-03

Clothing and furnishing (% to PFCE)

(Office of Textile Commissioner, 2016)

16 | P a g e
 4.1.2 Production

Table 3 Production of Spun yarn, Filament Yarn and Fabric

Invalid Items Units 2007-08 2008- 2009- 2010- 2011- 2012- CAGR
09 10 11 12 13 (08-
source (P) 13)
specified.
1 Production of S pun Yarn

(i) Cotton Mn. K g. 2,948 2,896 3,079 3,490 3,126 3,583 3.98%

(ii) Blended Mn. K g. 677 655 707 796 789 828 4.11%

(ii) 100% non-cotton. Mn. K g 378 361 407 427 457 457 3.87%

Total Mn. K g 4,003 3,912 4,193 4,713 4,372 4,868 3.99%

2 Production of Filament Yarn

(i) Viscose filament yarn. Mn. K g 51 42 43 41 42 43 -3.35%

(ii) Nylon filament yarn Mn. K g 28 28 30 34 28 23 -3.86%

Polyester filament yarn Mn. K g 1,420 1,332 1,435 1,462 1,380 1,288 -1.93%
(iii)
Polypropylene yarn Mn. K g 11 15 15 13 13 17 9.1%
(iv)
Total Mn. K g 1,510 1,417 1,523 1,550 1,463 1,371 -1.91%

3 Production of Fabric CAGR

(07-
12)
(i) Cotton Mn S q. 27,196 26,898 28,914 31,718 30,570 2.97%
Mtr
(ii) Blended Mn S q. 6,888 6,766 7,767 8,278 8,468 5.30%
Mtr
100% non-cotton (exclude. Mn S q. 21,173 20,534 22,840 21,765 20,567 -0.72%
(iii) Khadi, wool and silk) Mtr
Khadi, wool & silk Mn S q. 768 768 812 798 848 2.51%
(iv) Mtr
Total Mn S q. 56,025 54,966 60,333 62,559 60,453 1.92%
Mtr

(Office of Textile Commissioner, 2016)

The production cycle of the textile industry starts from raw materials such as cotton, jute,
wool, silk, and in the case of synthetic textiles from specific petroleum products. Natural
fibers like cotton, jute, wool, silk is spun into yarn while man-made staple fibers and
filament are processed from petroleum products. While man-made staple fibers are spun

17 | P a g e
into yarn, man-made filaments forming a continuous thread are directly used as yarn. These
yarns are then either woven or knitted into fabric which is finally converted into apparel
and home textile products. Technical textile products can be manufactured from fiber, yarn
or fabric stage.
India is the second largest producer of fiber in the world and the major fiber produced is
cotton. Other fibers produced in India include silk, jute, wool and man-made fibers.
About 60% of the Indian textile Industry is cotton based.

Table 3 Production of Spun yarn, Filament Yarn and FabricError! Reference source
not found. gives details of the production of yarn and fabric over the past few years. Yarn
can either be spun yarn or filament yarn. Yarn produced from staple fiber is called spun
yarn while filament yarn is in the form of a continuous thread. India is very competitive in
the spinning sector. Cotton yarn is dominant amongst various types of spun yarn while
polyester yarn is dominant amongst all filament yarns produced in India.

Major filament yarns produced in India are: viscose, polyester, nylon and polypropylene.
Viscose is used to make viscose filament or rayon, which is commonly used in dresses,
linings, shirts, shorts, coats, jackets, and other outer wear. It is also used in industrial yarns,
upholstery and carpets. Polyester is one of the most important filament yarns produced in
India comprising 94% of the total filament yarn production in terms of quantity during the
six-year period 2007-13. It is used in making apparel and home furnishings besides other
industrial uses. Polypropylene is a major polymer used in nonwovens. Most of it is used
for diapers or sanitary products where it is treated to absorb water. Nylon is widely used in
the manufacture of carpets apart from being used as industrial yarn in manufacturing of tire
cord.

Fabric produced in India can also be divided into certain categories according to the type
of yarn used: cotton, blended, ‘Khadi, wool and silk’ and 100% non-cotton. In terms of
quantity, fabric production in India increased from 56.0 billion square meters in 2007-08
to 60.5 billion square meters in 2011-12 at a CAGR of 1.92%. Per capita availability of
fabric has been on a rising trend with the growth rate of fabric production being greater
than the growth rate of population in India. Table 3 Production of Spun yarn, Filament
Yarn and Fabric gives the details.

4.1.3 Consumption Expenditure

Table 4 Final Consumption Expenditure on Textiles (Clothing and Furnishing) in 2011-12

gives the state-wise shares in consumption expenditure in 2011-12. The 2011-12 national

18 | P a g e
final consumption expenditure value of textiles including clothing and furnishing have
been derived by using national consumption expenditure data given in the National
Accounts Statistics (NAS) 2011-12 and data from the Household
Consumption Expenditure Survey conducted by the National Sample Survey Organization
(NSSO) in 2011-12. While the national figure for clothing is separately available from
NAS, consumption of furnishing is included in the broad category ‘Furniture and
Furnishing’. To estimate the figure of furnishing, the ratio of consumption of furnishings
to consumption of ‘furniture and furnishing’ was first calculated using the NSSO data and
then multiplied with the relevant NAS category. Final consumption expenditure data from
NAS on both furnishing and clothing were added to obtain the total consumption
expenditure on textiles. Furnishing was found to constitute 4.4% of the total final
consumption expenditure on textiles. State-wise shares of consumption of textiles were
estimated from the NSSO data. The consumption figure from NAS was multiplied by these
to obtain the state-wise distribution of textile consumption.

The final consumption expenditure on textiles in India was Rs. 3,49,647 crore in the year
2011-12. State-wise figures for consumption give a clearer picture of distribution. Figures
show that the top five states in terms of textile consumption – Uttar Pradesh, Maharashtra,
Andhra Pradesh, West Bengal and Bihar – accounting for nearly half (approx. 47.4%) of
the total national consumption expenditure on textiles also account for 49.1% of the
national population. The two major factors that seem to influence consumption of textiles
are population and per capita GSDP. States with a higher population and per capita GSDP
are expected to have a correspondingly greater demand for textiles.

Table 4 Final Consumption Expenditure on Textiles (Clothing and Furnishing) in 2011-12

S tate Consumption S hare in all Rank S tate Consumption S hare in all Rank
Expenditure S tate Expenditure S tate
(Rs. Crore) Consumption (Rs. Crore) Consumption
Expenditure Expenditure
(%) (%)
Uttar Pradesh 46,865 13.74 1 Uttaranchal 3,785 1.11 19
Maharashtra 40,297 11.81 2 J am. & Kashmir 3,389 0.99 20
Andhra Pr. 29,399 8.62 3 Him. Pr. 2,863 0.84 21
West Bengal 24,153 7.08 4 Tripura 980 0.29 22
Bihar 21,084 6.18 5 Meghalaya 864 0.25 23
Tamil Nadu 20,010 5.86 6 Manipur 570 0.17 24
Rajasthan 19,775 5.80 7 Goa 544 0.16 25
Karnataka 18,098 5.30 8 Nagaland 525 0.15 26
Gujarat 16,693 4.89 9 Pondicherry 458 0.13 27
Madhya Pr. 15,373 4.51 10 Arun. Pradesh 413 0.12 28

19 | P a g e
 K erala 14,035 4.11 11 Chandigarh 401 0.12 29
Haryana 12,299 3.60 12 Mizoram 399 0.12 30
Punjab 11,330 3.32 13 S ikkim 258 0.08 31
Orissa 8,421 2.47 14 A & N Islands 225 0.07 32
Delhi 7,699 2.26 15 D & N Haveli 101 0.03 33
Jharkhand 7,240 2.12 16 Daman & Diu 58 0.02 34
Chhattisgarh 6,506 1.91 17 Lakshadweep 24 0.01 35
Assam 6,070 1.78 18 All S tates 3,41,205 100.00

(Office of Textile Commissioner, 2016)

4.1.4 Value chain overall Textile sector

Indian textile and apparel sector is fragmented into organized and unorganized sectors. The
unorganized sector primarily consists of handloom, small scale mills and medium scale
mills while organized sector has large scale units with high production capacity. This
structure allows the textile and apparel sector to cater to both large and small customers.
Table 4 Final Consumption Expenditure on Textiles (Clothing and Furnishing) in 2011-12
depicts the typical production process of value addition in textiles as we move from raw
materials to finished products. The value chains of cotton, man-made fiber and wool most
closely resemble the typical all-segment value chain. This is described below.

Note: In India, we have all possible combination of vertical integration. Agents are
sometime present between two processes, especially when trade is with or between
unorganized players.

20 | P a g e
Figure 4 Textile Value Chain: Typical All-Segment Pattern

(ICRA, 2016)

4.1.5 Segment wise Input structure of Textile products

Textile products are produced out of two types of inputs: textile inputs and non-textile
inputs. The latter can be divided into non-textile goods and services. Thus, the broad input
structure may be divided into three parts: textile inputs, non-textile inputs (goods) and non-
textile inputs (services). The relative shares of each are given in Table 5 Inputs to Textile
Products: Relative Shares of Textile and non-Textile Inputs Details of relative shares of
inputs from the textile sector to produce textile sector outputs are shown in Table 6 Textile
Inputs for Textile Products: Relative Share of Inputs in Total Inputs Textile products are
produced out of textile inputs in different mixes and blends and at different stages of value

21 | P a g e
added. Textile inputs account for a share of total inputs ranging from 38.4% percent in the
case of Jute, hemp and Mesta textiles to 52.1 percent in the case of cotton textiles.

Table 5 Inputs to Textile Products: Relative Shares of Textile and non-Textile Inputs

Structure of Khadi, Cotton Woollen Silk Art, silk, Jute, Carpt R Misc. Synth
Inputs cotton textiles textiles textiles synth. hemp weavig MG textile fibres,
textiles fiber , prdts resin
(handlo textiles Mesta
oms) Textile
s

Textile inputs 46.3 52.1 45.1 38.7 40.6 38.4 42.2 47.1 41.3 14.1

Non-textile inputs
(goods) 16.2 11.9 19.5 25.2 28.4 19.5 19.9 16.5 23.4 58.4

Non-textile inputs
(services) 36.5 34.2 33.9 35.0 29.7 39.6 36.7 35.3 33.6 22.4

Total Non-textile 52.7 46.1 53.4 60.2 58.1 59.0 56.6 51.9 57.0 80.7
inputs
Non-textile inputs
(not shown) 1.0 1.8 1.4 1.0 1.3 2.5 1.2 1.0 1.7 5.2

Total 100 100 100 100 100 100 100 100 100 100

(Office of Textile Commissioner, 2016)

Table 6 Textile Inputs for Textile Products: Relative Share of Inputs in Total Inputs
Product Khadi, Cotton Woolen S ilk Art J ute, Carpet R MG Misc.
cotton textiles textiles textiles silk, hemp, weav. textile
textiles synthetic mesta prdts
(handlooms) fiber textiles
textiles
Jute 0.02 0.02 0.01 0.06 0.51 22.59 3.74 0.05 0.13
Cotton 10.91 28.36 10.74 0.79 5.62 1.21 0.40 1.08 7.61
K hadi, cotton 10.87 1.11 0.35 1.38 0.33 0.27 1.08 3.03 2.04
textiles(handlooms)
Cotton textiles 15.37 6.63 2.58 5.82 2.19 1.22 4.16 16.55 7.40
Woollen textiles 0.02 0.10 17.85 0.50 0.62 3.45 7.69 1.20 0.72
S ilk textiles 0.00 0.23 0.20 11.47 0.91 0.49 0.46 1.33 0.42
Art silk, synthetic fibre 8.73 7.81 6.10 11.70 15.38 3.79 10.73 10.26 10.75
textiles
Jute, hemp, mesta 0.08 0.24 1.11 0.37 0.29 3.59 3.26 0.59 0.58
textiles
Carpet weaving 0.00 0.02 0.25 0.01 0.01 0.00 0.01 0.01 0.01
Readymade garments 0.01 4.32 4.29 0.51 1.02 0.35 2.30 3.12 1.83

22 | P a g e
Miscellaneous textile 0.14 2.58 1.43 3.88 2.54 1.04 6.61 6.93 4.71
products
S ynthetic fibres, resin 0.14 0.68 0.21 2.22 11.22 0.41 1.73 2.96 5.14

S um 46.28 52.08 45.12 38.73 40.64 38.41 42.17 47.10 41.34

4.1.6 Estimation of Revenue Neutral Rates: Textile sector as whole

Error! Reference source not found. provides estimates of revenue neutral rates for the
textile sector as a whole. RNR for Central vat and State VAT are estimated separately. In
each case, RNR is considered in three parts: RNR only for taxes paid by textile dealers
(output tax), RNR when blocked input taxes are also included, and RNR when improved
compliance is also taken into account.

In the case of State VAT, RNR is also estimated when states raise an amount expected to
be raised if the AED system was continued.

Table 7 Revenue Neutral Rates: Textile Sector (Reference Year: 2014-15)

Head Revenue (Rs crore) RNR

(%)
CGS T

RNR wrt to Central vat paid by Textile Dealers 2,166 1.2

RNR wrt to Potential Central vat (on Output) 5,771 3.1
RNR wrt Potential Central vat including blocked input taxes 10,070 5.4
SGST

RNR wrt to Potential State vat (on Output) 3,526 1.9

RNR wrt to State VAT paid by Textile Dealers and blocked input taxes 6,238 3.6

R NR wrt potential State vat including blocked input taxes, CST, and 7,276 3.9
ET
Benchmark: RNR wrt raising AED equivalent 6,197 3.3
Combined

RNR wrt to Potential Central vat and State vat 17,346 9.3
(Office of Textile Commissioner, 2016)

Clearly, if we look only at the RNR with respect to output taxes paid by the textile dealers,
it is very low. An appropriate comparison would be between potential tax revenue
attributable to the textile sector that includes output tax and blocked input taxes applied on
an estimated base under the present tax system and the potential revenue under GST
estimated by applying a GST rate on an estimated base. In this comparison, the RNR comes

23 | P a g e
out to be 9.3%. The RNR for the central taxes is 5.4 and that for state taxes is 4.0. This is
still much lower than 12%, which might be the lowest rate (6% CGST and 6% SGST) in
the dual tax regime. We conclude therefore that for the textile sector considered as a whole
the movement to GST will lead to additional tax burden. If the GST rate is fixed at 12%,
effectively the tax rate will increase by a margin of about 30 percent. However, there would
be several positive and productivity enhancing effects of GST that may mitigate the adverse
effect of the increased rate under GST.

4.1.7 Segment wise revenue Neutral Rates

Table 8 Estimation of Revenue Neutral Rates gives the estimates of revenue neutral rates
for the main segments of the textile sector

Table 8 Estimation of Revenue Neutral Rates

Sector RNR (%)

Khadi, cotton textiles (handlooms) 4.0
Cotton textiles 7.1*
Woolen textiles 9.3
S ilk textiles 9.6
Art silk, synthetic fiber textiles 10.2
Jute, hemp, Mesta textiles 9.0
Carpet weaving 5.6
Readymade garments 10.5**
Miscellaneous textile products 12.0
All Segments 9.3
(Office of Textile
Commissioner, 2016)

Notes:
* In the current regime of Central Excise, units are offered the option of not paying the
output tax, if they do not claim any input tax credit. While detailed data are not available,
industry observers indicate that more than 90% of the units take this optional route. This
study assumes that the ITC involved is the same amount as the output tax liability and that
is the reason why the Central Excise authorities have provided this option. If the actual
ITC is lower than the output tax, the effective rate would be lower.
** In the case of Readymade Garments made purely out of cotton, including the Hosiery
sector, the RNR would be closer to that of cotton textiles, which is 7.1%.

24 | P a g e
Table 8 Estimation of Revenue Neutral Rates indicates that RNRs are highest for the
miscellaneous textile products and the readymade garments segments and relatively lower
for the handloom, carpet weaving and cotton textile sectors.

In deciding a suitable form of GST for textiles, issues as to whether some segments can be
exempted or whether selective concessions may be given often arise. It may be
remembered that any exemptions or selective concessions would block input taxes, which
will remain hidden as at present. What can be unambiguously argued is that if there is one
single GST rate (CGST+SGST), it would suit the textile industry that this rate is kept as
low as possible. If there is a dual rate, textiles should be placed at the lower rate.

4.2 Impact Analysis of GST on Textile

Industry

4.2.1 Excise Duty taxation rate for textile industry will be low

The domestic textile industry has an optional route to pay zero excise duty across various
stages of the value chain, provided they don’t claim the Input Tax Credit (ITC) at any
stage. Most of the players in the value chain operate through the optional route, thereby
resulting in lower duty incidence. Some of the key reasons are:

1. Domestic spinning industry is largely cotton-based which is not subject to excise,

and hence the extent of ITC will be minimal

2. Fragmented nature of weaving industry with a large presence of the SSI sector
operating under the composite scheme for taxation, hence units in the downstream
sectors, like those involved in processing, garmenting etc cannot claim ITC

3. With no ITC, the apparels/home textiles have not been attracting excise duty till
FY2016; in the Union Budget of 2016, a concessional excise duty of 2% (with
abatement of 40%), i.e. effective rate of 1.2% was applied for branded garments
with MRP of >Rs 1000

25 | P a g e
 4. However, the man-made fiber sector to some extent operates on a regular duty
structure while claiming ITC, as the fiber (polyester, nylon, viscose etc) attracts
duty at the manufacturing stage, unlike cotton

Accordingly, the ~290 spinning companies rated by ICRA (Revenue of ~48000 crore in
FY2015) attracted an excise duty incidence of less than 1%, which reflects the optional
route chosen by the spinners. The duty incidence is largely on account of the players
operating with manmade fiber, whereas cotton spinners operate at nil duty.

Similarly, the effective excise duty paid by ~190 weaving units rated by ICRA (Revenues
of ~ Rs 8800 crore in FY2015) attracted the excise duty incidence of less than 1% with
cotton-based players operating at nil duty structure.

Table 9Net effect on demand due to a shift to GST from the current indirect tax structure

(Office of Textile Commissioner, 2016)

26 | P a g e
 4.2.2 Negative because of current incidence of low tax rate;
especially on cotton value chain; exports however, will
not be impacted as it will be zero-rated

While the final GST rates are yet to be announced, even at the 12% lower rate
recommended by the Dr. Arvind Subramanian Committee, the textile sector is likely to
be negatively impacted. The cotton value chain is likely to be the worst affected as it is
currently attracting zero central excise duty
 Currently, the State VAT is ~4~5% on apparels and with ~1.2% effective central
excise duty on branded garments with MRP of more than Rs 1000, the overall tax
incidence on the finished goods, i.e. apparels is much lower than 12%, which is the
lowest rate being proposed in GST.

 At 12% rate, the apparel retailers will not have sufficient input credits (such as
service tax on rent of showrooms) to offset the increased tax liability if the GST is
not levied on upstream sectors like yarn and fabrics and will be negative for
retailers.

 Within the spinning industry, the cotton-based players will be adversely impacted
as GST levy will require an increase in cotton yarn prices as the ITC will not be
sufficient to offset the increased tax liability under GST. The manmade spinning
sector, which uses fibers which are currently being taxed, is unlikely to have an
adverse impact due to GST.

Fabric manufacturing in India is largely carried out through the SSI sector, where many of
the companies operate under the composite scheme of taxation (applicable with turnover
of up to Rs 1.5 crore). ITC cannot be claimed on purchases from suppliers under composite
scheme. With GST on yarn, the apparel manufactures would prefer to deal with GST-
compliant fabric suppliers to avail ITC.

27 | P a g e
 Table 10 Estimated share of textile segments in tax base

Relative Shares in Estimated GST

Textile Outputs
Tax Base (%)
Khadi, cotton textiles (handlooms) 1.2
Cotton textiles 39.5
Woollen textiles 4.3
Silk textiles 1.6
Art silk, synthetic fibre textiles 18.7
Jute, hemp, mesta textiles 0.8
Carpet weaving 1.0
Readymade garments 16.3
Miscellaneous textile products 16.6
Total 100.0

(Office of Textile Commissioner, 2016)

Accordingly, ICRA also expects that due to reduced tax advantage of cotton yarn vis a
vis man-made yarn, there can be a gradual shift in the domestic textile industry towards
manmade fiber. It may be noted that India currently operates with a fiber mix of cotton:
manmade of 60:40; as against global average of cotton: manmade of 40:60. However, the
above impact will be dependent on the final rates which will be applicable to the sector.

Incentive to deal with GST-compliant suppliers: Table 11 GST Tax incentive rates
depicts how GST non-compliant suppliers will become uncompetitive vis a vis GST-
compliant suppliers as the purchaser won’t be able to take input credit.

Table 11 GST Tax incentive rates

RM GST on Total Value Selling Selling price with

Purchase RM@12% Cost Addition Price GST@12% and
Exhibit Profit
without availing ITC
GST
GST Compliant 150 18 168 20 20 208 x 12-18 = 215
Supplier
GST Non-Compliant 150 18 168 20 20 208 (Not availing ITC)
Supplier

28 | P a g e
Cost to Purchaser Net
Cost
Supplier is GST- 215 25 190 Purchaser can take credit of Input GST on its sale
Compliant
Supplier is not GST- In absence of input credit, non-compliant suppliers will
208 0 208
Compliant become uncompetitive
(ICRA, 2016)

4.2.3 Policies and government incentives to textile industry

1. Government Initiatives

The Indian government has come up with a number of export promotion policies for the
textiles sector. It has also allowed 100 per cent FDI in the Indian textiles sector under the
automatic route

2. Sector Policy
 Technology Upgradation Fund Scheme has infused investment of more than INR
2500 Billion in the industry. Support has been provided for modernisation and
upgradation by providing credit at reduced rates and capital subsidies.

 Scheme for Integrated Textile Parks provides world class infrastructure to new
textile units. To date, 57 Textile Parks have been sanctioned with an investment
of INR 60 Billion. By 2017, 25 more Textile Parks are to be sanctioned.

 Integrated Processing Development Scheme for sanctioning processing parks

has been initiated. INR 5 Billion has been earmarked for this scheme.

 Integrated Skill Development Scheme has provided training to 1.5 Million

people to cover all sub-sectors of textiles such as Textile and Apparel,
Handicrafts, Handlooms, Jute and Sericulture.

29 | P a g e
 Figure 5 VAT and Sales Tax structure in India

4.2.4 Tax Incentives to Textile Industry in Current Scenario

 Companies Engaged in Manufacture Having an In-House R&D

Centre: A weighted tax deduction of 200% under Section 35 (2AB) of the
Income Tax Act for both capital and revenue expenditure incurred on
scientific research and development.

 State Incentives:
o Apart from the above, each state in India offers additional incentives for
industrial projects. Some of the states also have separate policies for the
textiles sector.
o Incentives are in areas like subsidized land cost, relaxation in stamp duty
exemption on sale/lease of land, power tariff incentives, concessional rates
of interest on loans, investment subsidies/tax incentives, backward areas
subsidies and special incentive packages for mega projects

 Export incentives:
o Export Promotion Capital Goods Scheme (PCGS)
o Duty Remission Scheme
o Focus Product Scheme, Special Focus Product Scheme, Focus Market
Scheme

 Area-Based Incentives: Incentives for units in SEZ/NIMZ as specified in

respective acts or the setting up of projects in special areas such as the
North-east, Jammu & Kashmir, Himachal Pradesh & Uttarakhand.

30 | P a g e
 4.3 Interpretation

4.3.1 Impact: Positive for capital investments

1. Current scenario
Generally, the indirect taxes paid on the capital goods (excise duty and sales tax for
domestic purchase; custom duty, CVD and SAD on import) can be set off against the
indirect taxes payable on the sales.

However cotton based textile manufacturers, which operate under optional duty route in
domestic market, the set-off against these indirect taxes, is not possible and accordingly it
increases the cost of capital investments.

However cotton based textile exporters; typically purchase imported capital goods under
Export Promotion Capital Goods Scheme, whereby they take full exemption on payment
of custom duties provided they export six times of the duty saved over a period of six years.
The other indirect taxes on domestic machinery are to be paid upfront even by the exporting
companies and subsequently the refund is claimed. Hence, they are unlikely to be impacted
under GST.

2. Under GST Scenario:

With textile sector coming under GST, textile players which are oriented towards
domestic markets will be able to set-off the GST paid on domestic capital goods
(but not the import duty) as their sales will be subject to GST. Accordingly, this
will reduce the cost of capital investments and hence will be positive for the
players operating in domestic markets.

4.3.2 Impact: Duty drawbacks to lose relevance

With Input tax credit chain becoming more transparent and integrated, the tax credit for
exporters will become easier and full credit of indirect taxes can be claimed; and the duty

31 | P a g e
drawback scheme, which aims to provide credit of indirect taxes will lose relevance under
GST.

For the exporters, where the current duty drawback rates are lower than the incidence on
indirect taxes on inputs, they will benefit under GST due to improved transparency on level
of indirect taxes under GST. Conversely, the sectors, where the drawback rates are higher
than actual incidence of indirect taxes on inputs will face challenge on profitability.

4.3.4 Points to focus through Interpretation of Data and

Analysis

1. Indirect tax incidence in textile sector is currently low due to availability of

optional route of payment of excise duty.

2. For ~480 companies rated by ICRA in spinning and weaving sectors with
turnover of ~57000 crore, the excise duty incidence is lower than 1% as the
textile chain is largely cotton-based.

3. The proposed GST rate of 12% to have negative impact on the textile sector
due to current incidence of low rates.

4. Cotton-based value chain to be adversely affected, in comparison to the man-

made textile sector

5. GST on cotton textile chain can lead to gradual shift towards man-made fiber
which was already subjected to indirect taxes

6. Lack of input credit to disincentives the suppliers to remain outside GST, else
the prices of their goods can become uncompetitive.

7. With cotton textile sector coming under GST, companies oriented towards
domestic markets will be able to claim ITC on capital goods thereby reducing
cost of capital investments.. With improved transparency on input taxes which
will be fully refunded to exporters, the duty drawback scheme will lose
relevance.

32 | P a g e
 Chapter 5
Summary of Findings

5.1 Conclusion
5.2 Research findings and Recommendations
 5.1 Conclusion

5.1.1 Impact of GST on Textile Industry

The Indian textiles and apparel industry contributes nearly 10% to manufacturing
production, 2% to India's Gross Domestic Product (GDP) and constitutes 13% of
country's export earnings. The industry, currently estimated at around $ 108 billion,
is expected to reach $ 223 billion by 2021. Textile industry has been enjoying various tax
exemptions, concessions under indirect taxes. Introduction of GST replacing the present
indirect taxes could have considerable impact on textile industry. In this article, an effort
has been made to shed some light on GST impact.

5.1.2 GST rate and its Impact on Textile Industry

Impact of GST on textile industry could be determined only after final rates are declared
for the goods. Presently, most of the garment manufacturers opt for either complete excise
duty exemption or payment at 2% duty without Central vat credit benefit as most of the
raw materials do not suffer excise duty, especially in case of cotton based sector. On
branded garments, the effective excise duty rate would be 1.2% (if opted for 2% payment
with abatement of 40%) or 7.5% (if opted for 12.5% payment with abatement of 40%). The
sales tax would also be paid at lower rates or at concessional rates under composition
schemes as applicable in different states.

Exports have continued to be free from taxes all these years. In GST regime, most of the
indirect taxes such as central excise duty, service tax, VAT / Sales tax and entry tax would
get subsumed. For textile and its products, the GST rate of 12% is expected. If it is so, then
it could have a negative impact as the industry is as such price sensitive. Paying 12% GST
would be costlier for assesses who presently paying 1.2 % excise duty + 5% to 6% of VAT
which amounts to 6 to 7.2% tax. Even input tax credit on inputs and input services may not
be sufficient to fill the gap as natural raw materials such as cotton may continue to get
exemption in GST regime.

It may be noted that other materials such as chemicals, dyes, accessories and packing
materials which constitutes around 8% to 12% of total material cost could be liable for
GST.

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Textile of 18% which is eligible as input tax credit when output GST is paid.
However, in case of manmade fiber segment, most assesses have been paying excise duty
at regular rates along with VAT. Inputs such as polyester fiber, nylon and other
petrochemicals suffer excise duty which can be claimed as Central vat credit.
This segment may get level playing field as GST rate of 12% could have positive impact
on them who are already paying more than 12% tax. For this sector, seamless credit could
also result in lower price of goods which could boost demand for noncotton garments
benefitting consumers by way of price reduction. It is expected that there can be a gradual
shift in the domestic textile industry towards manmade fiber under GST regime due to tax
advantage.

Figure 6 Productivity improving Channels of GST

(ASA & Associates, 2015)

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5.1.3 Other Positive Effects

Some of the longer term positive effect would be as follows.

► GST is likely to have a fiber-neutral rate structure unless differentiation is

introduced by explicit choice (Fiber Neutrality Effect);

► Textile outputs will be taxed if domestically consumed and input taxes paid will
be rebated making the tax-regime transparent (Transparency Effect);

► Exports will be zero-rated and all input taxes paid will be rebated by the tax
authorities making duty drawback kind of schemes redundant (Export Zero-
rating Effect);

► Fiscal barriers to inter-state movement of textile inputs and outputs like the CST
and the entry tax will be eliminated (Common Market Effect);

► Taxes on capital and machinery will be fully rebated (Investment Promoting

Effect);

► For the industry, compliance costs will be lower (Compliance Promoting Effect).

5.1.4 Prospects and Policy Support

1. Cotton consumption has witnessed a sustained increase since 2014-15 due to

the growing demand for Indian cotton textiles and subsequently, there has been
considerable expansion and modernization of the textile mills.

2. India did not keep pace with the growth in domestic cotton production, which
has led to a surplus of production since 2014-2015. As a result, India has
emerged as one of the top exporters of raw cotton in the world.

3. India is also the second largest producer of man-made fibers (MMF) also.
However, India’s share in global exports of value-added textiles of manmade
fibers is miniscule at around 2.25% in 2008 (India’s MMF exports were US$
3.3 billion as against global exports of US$ 146.7 billion).

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 4. The domestic MMF to cotton fiber consumption ratio in India is 41:59 (FY09)
while it is the reverse globally. The share of man-made fibers in total fiber
consumption has risen from 25% in the early nineties to 41% at present.

5. India has a number of schemes for rebating or subsidizing textile exporters.

These include duty drawback schemes, The duties and tax neutralized under the
scheme are (i) Customs and Union Excise Duties in respect of inputs and (ii)
Service Tax in respect of input services. The Duty Drawback is of two types:
(i) All Industry Rate and (ii) Brand Rate.

6. There are also duty credit scrips. Under these schemes specified products and
specified sectors are incentivized by way of Duty Credit Scrips ranging from
2% to 5%. Additional customs duty/excise duty paid in cash or through debit
under this scrip is adjusted as CENVAT Credit or Duty Drawback.

7. Increasingly, most of these schemes are falling on the wrong side of WTO
restrictions. Under GST, zero-rating of exports would imply that most of these
schemes would not even be necessary.

5.1.5 Problems/Difficulties in Implementation of GST in India

Presently, the tax structure of India is very complex. Looking to the global developments
and tax structure of developed countries, GST is the need of the hour. The need of GST
can further be explained in the following points: -

 There are various definitional issues related to manufacturing, sale, service,

valuation etc. arises. These needs to be rationalized.
 Several transactions take the character of sales as well as services, thus there is
complexity in determining the nature of transaction.

 The mechanism of imposing taxes, exemptions, abatements, other benefits are

different in state and center.

 Existing law has resulted in significant number of issues related to interpretation

or various provisions and the category of the products and the nature of services.

 Administration mechanics of the center and state and even in different states is
different.

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 India needs comprehensive levy and collection on both goods and services at the
same rate with the benefit of input credit.

 A simple tax structure can bring greater compliance, thus increasing number of
tax payers and in turn tax revenues of Government.

 GST will ensure competitive pricing. Tax paid by final consumer will come
down in most cases. Lower prices will help in boosting consumption which is
beneficial to Companies.

 GST will ensure boost to exports. When the cost of Production falls in the
domestic market, Indian Goods and services will be more price competitive in
foreign markets.

 The current state of Indian Economy demands fiscal consolidation and reduction
in Fiscal deficit. A recent Report by CRISIL states that GST is the country’s best
bet to achieve fiscal consolidation.

5.2 Research Findings and Recommendations

Indirect tax reforms have been as integral part of the liberalization process
since new economic reform. A progressive and welfare oriented nation like India
tries to keep a balance between direct and indirect taxes. This chapter attempts to
understand the concepts and methodological approach required to analyze the
impact of Sales tax, VAT and GST on the Textile Industry as well as the revenue
growth of the Govt. at state and national level.

The Important findings and recommendations of the research study is as follow:

1. GST and State Autonomy rightly points out that tax coordination and
harmonization across states can be achieved by floor rates of GST for different
goods.

2. It would be in the interest of both state governments and taxpayers. In the medium
term, a consensus Tax Administration Act will greatly reduce the cost and it will
lead to increase the profitability of an organization.

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3. Universally GST has been adopted for correcting the fiscal imbalances as it works
well within all political and legal constraints.

4. GST system would also increase the tax revenue as well as the profitability of the
organization.

5. GST has an inbuilt device for reducing the cascading effect by restricting the levy
to actual value addition.

6. GST encourages growth by confining tax burden to the net economic contribution
of the taxpayer’s results in no double taxation.

7. Introduction of GST will have brought more transparency in the tax structure. At
every stage of transaction, GST indicates the quantum of tax payable after adjusting
tax credits.

8. The important objective of Tax policy in India was to improve the tax to GDP ratio.
Therefore, GST has earned the reputation of being a dependable revenue raising
instrument.

9. The management of GST in India calls for a separation of duties of different

functionaries of Tax department. It requires special attention on falters.

10. Availability of authentic information should be a matter of right for the dealers.
Requisite publicity of their rights and duties with dos and don’ts and use of
telephone and electronic means would help developing proper provisions for
introducing GST in India.

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 Appendices

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Royal Malaysian Customs Department. (2014, 1 24). Countries Implementing GST.

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ASA & Associates. (2016). Textile industry in India. NIS Global.

Ghosal, S. (2016, 8 11). GST rate at 12% will negatively impact textile sector: ICRA .
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Ghosal, s. (2017, 3 4). economic times. Retrieved from

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Royal Malaysian Customs Department. (2017, 3 2). Countries Implementing GST.

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