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Tuesday, January 25, 2022

Explained: Why the GST Council is reconsidering rates on textiles

🔴 The GST Council in its 45th meeting in September had recommended making certain rate changes for footwear and textiles to correct the inverted duty structure.

Written by Aanchal Magazine |
December 31, 2021 12:41:22 pm
gst council textile rates, gst rates on textilesIn November, the Finance Ministry notified a uniform 12% rate for manmade fibre (MMF), yarn, fabrics and apparels, along with a 12% uniform rate for footwear. (Express File/Arul Horizon)

The Goods and Services Tax (GST) Council is holding its 46th meeting Friday to discuss one agenda item — revision of rates in the textiles sector. Many representations have been made to put the proposed hike, effective January 1, on hold.

What is the proposal?

The GST Council in its 45th meeting in September had recommended making certain rate changes for footwear and textiles to correct the inverted duty structure.

An inverted duty structure arises when the taxes on output or final product is lower than the taxes on inputs, creating an inverse accumulation of input tax credit which in most cases has to be refunded. Inverted duty structure has implied a stream of revenue outflow for the government prompting the government to relook the duty structure. For footwear, the government refunds around Rs 2,000 crore in a year.

In November, the Finance Ministry notified a uniform 12% rate for manmade fibre (MMF), yarn, fabrics and apparels, along with a 12% uniform rate for footwear. The rate hike was notified to be made effective from January 1.

At present, tax rate on manmade fibre, yarn and fabrics is 18%, 12% and 5%, respectively. Apparel and clothing up to Rs 1,000 per piece currently attracts 5% GST. Synthetic and artificial yarn have been changed to 12% but natural yarn like cotton, silk, wool yarn are still in 5% slab.

What are the concerns?

Many states and industry associations have expressed concerns about the proposed rate hike for textiles to 12% from 5%.

Last week, Amit Mitra, the Principal Chief Advisor to West Bengal Chief Minister, had urged Union Finance Minister Nirmala Sitharaman to roll back the proposed hike. He said the new rate structure would cause closure of around 1 lakh textile units and losses of 15 lakh jobs nationally. Telangana Industries Minister KT Rama Rao too has urged the Centre to withdraw its proposed plan to hike GST rates.

In its agenda for Friday’s meeting, GST Council is learnt to have mentioned that Gujarat has made a representation to the Council stating that the decision to increase the GST rates on textiles from 5% to 12% may impact a large number of taxpayers dealing in the textile sector. The state has said that the textile sector has argued that such a decision may create a negative impact resulting in drop in demand and recession.

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