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.
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