An Open letter to Arun Jaitley Sir highlighting the areas of concern amidst GST on Textile Industry

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An Open letter to Arun Jaitley Sir highlighting the areas of concerns amidst GST on Textile Industry

Dear Sir,

Goods and Service Tax is indeed the largest economic reform since independence and the same is applauded by most of the Trade associations and the Institute of Chartered Accountants of India, of whom I am a proud member and the untiring efforts of the present Government has truly ushered a positive ambience of ”One nation , One tax“ across the country which shall surely benefit the businessman as well as consumers in the longer run.

However amidst the opposition of GST in Textile Industry and recent Lathi-charge by Police in Surat which is quite unfortunate, I would like to highlight certain areas in Textile Industry which need your kind attention as few of the GST provisons shall have a negative impact on the pricing of the goods and services in textiles. Though one may rightly argue that many of the demands of Textile Associations may be unreasonable and impracticable, I would like to bring forward the following “three” important areas of concerns which needs attention on priority basis as if these issues are overlooked, it shall have huge impact on the employment as well as revenue of our nation.

Area of Concern 1 :

At Yarn→ Grey stage , Composite Units shall be benefited  while it shall be difficult for Small Standalone units to survive in the post-GST Regime.

Analysis :

Grey is manufactured from Man-made Yarn after being subjected to processes like Twisting , Sizing and Weaving etc. The Composite Unit has all the machinery inhouse for manufacture of grey while Small Standalone units buys Yarn and manufactures Grey by resorting to job-work.

The man-made yarn was taxed at 12.5% excise and 5% VAT under the Pre-GST Regime.

Post GST, the rate of GST on purchase of Yarn is 18%. The same shall be available as ITC and available for set-off against GST on Sale of grey and hence the cost of grey shall slightly decrease. However, no refund is available against ITC accumulated and hence the same is added as part of cost and which shall ultimately lapse.

Though the Industry demands a rate of 12 % on Yarn however what is more important to observe here is that irrespective of rate of GST, the Small Standalone Unit shall stand to lose and find themselves difficult to survive in the post GST regime. This is because of following two reasons.

  1. Already when Grey manufacturers have enough accumulated credit liable to be lapsed due to input taxed at 18% and output at 5%, and in addition to this burden, when these Standalone Small Manufacturers gives Yarn on Job-work for Twisting, Sizing and Weaving, the GST of 5% on Job charges becomes an additional burden of cost and thus when the market is so competitive with informed buyers and informed sellers, it would be hard for these small standalone units to effect Sales at higher price. Already these Standalone Units have a somewhat higher cost of production as naturally their conversion cost would be more due to inclusion of profit margin of Job worker, a further increase in cost by 5% of job charges is enough to kick them out of the market and render thousands of workers jobless.

The following example shall make things more clear.

Suppose , hypothetically lets say M/s. Textile Duniya who is composite unit buys yarn at Rs. 200 / kg and pays Rs. 36 as GST on the same which produces 25 metres of grey which is sold at Rs.  15.5 per metre after incurring conversion process cost of Rs. 6 per metre of grey. In case of Small Standalone unit say M/s Textile Point , the conversion cost shall be 6.5 per metres due to profit margin of job worker.

Particulars

( for 25 metres of grey from 1 kg of Yarn)

M/s Textile Duniya

Composite unit

( in Rs. )

M/s Textile Point – Small Standalone Unit ( in Rs )
Yarn200200
Cost of Production
Conversion cost :

Rs. 6 per metre for own manufacturing and Rs. 6.5 per metre in case of job work.

150

( 6* 25 )

162.5

( 6.5 * 25 )

Accumulated ITC added as cost

( 387.5*5% – (200*18% ))

16.62516.625
GST on Job charges (accumulated  additional burden)Nil

( as own manufacturing )

8.125
Profit/ (Loss) ( balancing figure )20.8750.25
Sale

15.5 *25

387.5387.5

 

Had there been no GST on Job work, M/s Textile Point would have been profitable at this stage however due to GST on jobwork , it shall soon be out of market rendering his workers as well as its smaller job workers jobless.

Sir, it is duty of the Government to give a level playing field to all the Manufacturers     and not enrich Composite units at the cost of small Standalone Manufacturers.

2. In GST Regime, majorly there is no requirement to prove one to one correlation that input supply has been used for output supply. Thus the Composite Units shall have enough scope to use the accumulated ITC of yarn by investing in say a Digital Printing business where there is more value addition in terms of labour and electricity. As these Composite Units shall be able to use their accumulated ITC on Yarn against GST on supply of other diversified businesses like Digital Printing, where they shall collect GST from Customers but not pay the same to the Government due to setoff of credit of yarn, they can still further lower their price of grey.

Sir, In a longer run, there is also a hazard of business houses starting a Shell business and providing accommodation Bills to use the accumulated credit on yarn in order to pass on the credit to someone who can utilize it or claim refund against a cash commission resulting into huge Revenue loss to the Government.

Recommendations :

GST on Jobwork in whole value chain in textiles should be exempted considering the fact that input is taxed at much higher rate than output.

OR

Refund should be granted against accumulated Input Tax Credit which is the fundamental right of any Businessman. If the said refund is available to many other businesses, what is the logic to not make the same available to Textiles ?

Area of Concern 2 :

There is utter confusion about the applicable rate of GST on jobworker doing Twisting, Warping and Sizing process on Yarn which then undergoes weaving to make Grey.

Analysis :

In my opinion, the News in Media/Newspaper that the rate on Job work of Twisting , Texturising and Sizing etc on Manmade yarn is reduced from 18% to 5% needs more clarification from CBEC.

Extracts of Notification 11/2017 dated 28.06.2017

Services by way of job work in relation to –

(b) Textile yarns (other than of man-made fibres) and textile fabrics; – 2.5% CGST ( ie 5% Total GST)

Explanation : “man made fibres” means staple fibres and filaments of organic polymers produced by manufacturing processes either,-

(a) by polymerisation ….

(b) by dissolution or chemical treatment of natural organic polymers ……

Interpretation 1 : When you read ” in relation to Fabrics” , it should mean the processes like Weaving resulting into Fabrics then similarly “in relation to Man-made yarn” should mean processes resulting into man-made yarn and these processes are also separately defined. Thus, the rate of GST on job work of Twisting, Warping and Sizing shall be 5% as these processes though impacted on Yarn ultimately “results into Fabric”

However, there is another school of thought that the rate of GST on job-work in nature of  Twisting, Warping and Texturising etc is still 18% as these processes still result into Yarn only at one stage and then goes on to make grey through weaving. These Job-workers feel the heat of uncertainty and future litigations which results into giving their support to the Stike/ Bandh in order to save their livelihood. Further as the Principal for whom these Job-workers are doing job-work when do not get the actual benefit of input credit of GST paid on job-charges due to they having already accumulated ITC on yarn, the Principal shall put pressure on the job-worker asking him to absorb some part of GST into his profit margin by unnecessarily reducing his base process charge resulting into lower profit to these job-worker. Thus this effect shall miserably fail the concept of indirect tax wherein the burden has to be passed onto the consumer.

Recommendations :

A clarification  is much needed from CBEC on this issue.

OR

A Composition scheme should be given to all textile job-workers who can pay 2% GST without passing on the credit and no ITC should be made available on inputs.

Area of Concern 3 :

Imported Fabrics will be cheaper hampering our Honourable’s Prime Minister’s Make-in-India Campaign.

Analysis :

Earlier, in addition to the basic custom duty, the  CVD ( Counterveiling Duty) on imported Fabrics were 12.5% plus education cess and SAD ( Special Additional Duty) was 4 % so total duty in lieu of Excise and VAT was coming to 17.56%.

Further this 17.56% on imported Fabrics was not MODVAT able or not considered as ITC and thus added to the cost of fabrics for Importers.

Now under GST , the rate of GST for fabrics has been determined at 5% and which the importers can use as input tax credit ( ITC) when they sale the fabrics in the market.

Hence technically the cost of fabric for Importers will be reduced by 17.56%.

This would again affect Indian Manufacturers to a huge extent and result into unemployment.  

Recommendations :

  1. Increase the Basic Custom duty in case of import from China, Vietnam etc
  2. Imposition of Anti-dumping or Safeguard Duty.
  3. Keep Import of Fabrics in Negative List so as to not allow them to take input tax credit.

Regards,

CA Mehul Rasesh Shah

Surat

mehul@raseshca.com

 

PS: Sir, while I totally and fully support the Government initiative of GST, however as a Common man and a Chartered Accountant whose ‘signature is more  valuable than a PM’ as announced by PM himself, I affix my signature  to this letter and I do believe that my above points do make some sense so as to invite attention and quick resolution of greviences of Textile Manufacturers and Traders. 

I am confident that once these issues are addressed and resolved along with some other tedious procedural aspects which needs to be further simplified , the Textile Industry shall welcome GST with open hands and give their valuable contribution to the nations’ largest economic reform. 

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5 COMMENTS

  1. Mehul this is a really a very nice analysis and solution to the problems which arises or may arise to textile industry

  2. Good points..Mehuljee,
    Yes it’s loss of huge chunk of tax revenue of government to few Countable composite units under new GST regime.
    Common textile manufacturing units generating major employment in the country are big sufferers. 1. They buy polyster/nylon based raw materials at much higher prices(on an average atleast 15% more price than the internationally available prices) than their competition fabric manufacturing factories of China, Indonesia and vietnam, due to monopolised supply sources and restrictedVietnam coot their raw materials. So it’s impossible for these manufacturers to compete in international market of fabrics and now locally yam manufacturers and spinners are given tax benefits of by way of differential tax rate.
    Do they need to accept such injustice because they are scattered, unorganised and not near to the people making the policies?
    2. Dumping of Imported fabrics will be huge blow in addition.

    Its like common man getting suffered from all the sides.

  3. Sir, a very good article but I feel for area of concern 1 I can claim refund of ITC under sec 54(3) and for point 2 for every business vertical in a state a separate registration is required and in that case a separate return will be filed and I doubt we can avail or utilize credit of one vertical with that of other vertical.

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