written by Khatabook | November 23, 2021

GST Update: Clothes, footwear to get costlier as GST increases from 5% to 12% from January 1

A GST hike has been announced on several finished goods such as textiles, garments, and footwear from 5% to 12% which may push up prices for these consumer goods in the next year. The move was announced by the Central Board of Indirect Taxes and Customs (CBIC).

The Ministry of Finance has notified a uniform GST rate on man-made fiber, fabrics, yarn, and footwear of 12 per cent which will be effective from January 1st, 2022. At present, the rate on artificial fiber, yarn, and fabrics is 18%, 12%, and 5% under the Goods and Services Taxation System.

Changes in GST Rates

  • The GST Rate on fabrics has increased from 5 percent to 12 percent whereas GST on apparel of any value has also increased to 12 percent. Previously, garments up to ₹1000 were subject to 5% GST.
  • The GST rate for textiles, which include synthetic yarn, fabrics, and other man-made items has increased to 12% from the previous 5%.
  • GST Rate on footwear of any value has been increased to 12 percent from 5 percent. Before this, footwear up to 1000 had GST of 5 percent

The move has been announced to correct the inverted duty structure that had been blocking the working capital in the textile industry due to credit build-up and cascading costs. Let us understand the inverted tax structure under the Goods and Services Taxation System and its impact on the various commodities and services.

What is Inverted Duty Structure under GST?

The term ‘inverted tax structure’ or ‘inverted duty structure’ refers to a situation where the rate of tax on inputs used or purchased is more than the rate of tax on outward supplies or the output for sale.

For example, the GST on raw materials or input such as non-woven fabric is 12 percent and the GST on finished goods or output such as a shirt or trousers is 5 percent.

This leads to the accumulation of taxes at different stages in the value chain. A refund can be claimed for the unutilized Input Tax Credit (ITC) on account of the inverted duty structure. The refund is available at the end of the tax period when such a situation has occurred.

However, taxpayers who face an inverted tax structure always have unused ITC in their accounts even after they pay off their output tax liability. This leads to blockage of working capital and wastage of critical resources. The process for getting refunds is also complicated and leads to many compliance issues for the taxpayers. On the other hand, the laws relating to claiming refund of Input Tax Credit are also confusing and cumbersome.

The inverted tax structure raises the cost of purchasing input goods which causes more expenses in manufacturing, leading to higher costs. In a world of fierce competition among businesses, such a structure leads to small margins and fewer profits for business 

For this reason, the GST Council had recommended correcting the inverted duty structure in the textile industry by establishing a uniform rate of 12% on all man-made textile, garments, and footwear.

Industry’s Reception

The manufacturers of textiles, garments, and footwear are disappointed with the move, fearing that the increased taxes will raise prices and trigger inflation. The GST Council had recommended the increase in the 45th council meeting held in September. In the textile industry, more than 80 per cent of the units come under the Micro, Small and Medium Enterprises (MSME) and the hike may come as a setback to the industry.

For the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting, follow Khatabook.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.