GST and the Indian Textile Industry 8 May 2015. Page 2 Taxes to be replaced by GST ► Main Taxes to be replaced are: ► Central taxes ► Central excise duties

GST and the Indian Textile Industry

8 May 2015

Page 2

Taxes to be replaced by GST

►Main Taxes to be replaced are:

►Central taxes

►Central excise duties and

►Service tax along with all relevant cesses and surcharges

►State taxes

►State VAT

►Central sales tax and

►Entry tax Implications of GST for Indian Textile Industry

Page 3

Main advantages of GST

► India-wide common market

► Absence of fiscal barrier (CST/Entry Tax) (Constitutional amendment proposes 1% tax on inter-states supplies)

► Single or limited number of rates

► Production efficiency

► Resource allocation

► No incentive for vertical integration

► Consumption efficiency

► Minimization of classification disputes

► Improved compliance

Page 4

Key effects of GST

► GST ► Reform

► Lower Price of Capital Goods

► Larger Capital ► Stock

► Improved Resource Allocation

► Higher Total Productivity

► Improved Competitiveness

► Higher ► Potential Output

Implications of GST for Indian Textile Industry

Page 5

Features of GST in India

► Dual GST: CGST and SGST

► Dual rate structure

► Lower rate: 12 %

► Standard rate: Estimates range from 20-27%

for the composite rate

► Exempt category

► Exports zero-rated, imports taxable

► Inter-state sales subject to

IGST=(CGST+SGST)Implications of GST for Indian Textile Industry

Page 6

Features of textile industry

►Large unorganized sector

►Large employment potential

►Mix of traditional and modern

►Low tax incidence

►Differentiated segments; composite products

►High export contribution and potential

Page 7

Share of textiles in potential GST tax base

1970

-71

1973

-74

1976

-77

1979

-80

1982

-83

1985

-86

1988

-89

1991

-92

1994

-95

1997

-98

2000

-01

2003

-04

2006

-07

2009

-10

2012

-13

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Clothing and furnishing (% to PFCE)

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

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

PFCE excluding food, education, and health

Page 8

Key aspects of current taxation system for textiles

► Usually low/ zero rates of taxes on final products

► Tax is shifted back to production (as opposed to consumption) leading to blocked input taxes and higher cost of production

► Inefficiencies in production

► Exemption of production inputs

► Duty Drawback Scheme

► Exemption by size of operation, giving rise to fragmentation of industry

► Complexities in compliance and administration

► Ad-hoc or piecemeal efforts to apply tax leads to significant opposition from all segments of textiles industry. Any piecemeal tax is complex, creates competitive distortions and is subject to collusion/ harassment by Tax Administration authorities


Page 9

Key aspects of current taxation system

► Classification disputes

► Fabrics vs garments, e.g. should Sarees be

treated as fabrics or as readymade garments

► Lack of Fibre neutrality

► Cotton fibre vs manmade fibre. Cotton fibre

treated favorably as compared to man-made

fibres

► Effective tax rates vary by degree of

integration

► Power looms vs Composite mills. Effective tax

rates for composite mills higher than that of

power looms discouraging integration of

production adversely affecting efficiency


Page 10

Textile segments

Nine broad categories

1. Khadi and handlooms

2. Cotton textiles

3. Woollen textiles

4. Silk textiles

5. Artificial silk and synthetic fibre textiles

6. Jute, hemp, and mesta textiles

7. Carpet weaving

8. Ready-made garments

9. Miscellaneous textile products


Page 11

Key concerns of textiles industry

► Break in input tax credit chain leads to blocked input taxes

► Complexities and distortions related to Small Business Threshold

► High compliance cost, especially for small units

► Lack of uniformity in Centre and States taxes: e.g., presently Job Workers are treated differentially under CENVAT and State VAT

► Continuing blockage of input taxes under GST – Petroleum products, Electricity, Real estate

► Possibility of some the taxes continuing after GST: e.g. Octroi, Entry tax, Electricity duty


Page 12

Estimated share of textile segments in tax base

Textile Outputs Relative Shares in Estimated GST 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


Page 13

Input structure across the nine textile categories- Shares by types of inputs

Structure of Inputs

Khadi, cotton textile

s (handlooms)

Cotton textile

s

Woollen

textiles

Silk textile

s

Art silk,

synthetic

fibre textile

s

Jute, hemp, mesta textile

s

Carpet weavi

ng

Readymade garme

nts

Miscellaneou

s textile produ

cts

Synthetic

fibres, resin

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 inputs

52.7 46.1 53.4 60.2 58.1 59.0 56.6 51.9 57.0 80.7

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 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Implications of GST for Indian Textile Industry

Page 14

Current Effective Tax Rates (RNR) - Combined for Centre and States

Textile Categories RNR (%)

Khadi, cotton textiles (handlooms) 4.0

Cotton textiles 7.1

Woollen textiles 9.3

Silk textiles 9.6

Art silk, synthetic fibre 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


Page 15

Category Base price

Base+ Present Taxes

Base+GST

Increase in

price (%)

Change in demand (own price relative to all prices effect) (%)

Change in

demand (income effect (%)

Net Change

in demand (%)

Khadi, cotton textiles (handlooms)

100 104.0 112 7.7% -2.2% 0.8% -1.4%

Cotton textiles 100 107.1 112 4.6% -1.3% 0.8% -0.5%

Woolen textiles 100 109.3 112 2.4% -0.7% 0.8% 0.1%

Silk textiles 100 109.6 112 2.2% -0.6% 0.8% 0.1%

Art silk, synthetic fiber textiles

100 110.2 112 1.6% -0.5% 0.8% 0.3%

Jute, hemp, mesta textiles

100 109.0 112 2.8% -0.8% 0.8% 0.0%

Carpet weaving 100 105.6 112 6.1% -1.7% 0.8% -1.0%

Readymade garments

100 110.5 112 1.4% -0.4% 0.8% 0.4%

Miscellaneous textile products

100 112.0 112 0.0% 0.0% 0.8% 0.7%

Total 100 109.3 112 2.5% -0.7% 0.8% 0.0%

Price and Income Effects- Net effect on demand due to a shift to GST from the current system

Assumption: GST is levied at a single rate of 12%

Page 16

Key empirical findings

►Overall current RNR lower than the sum of lower CGST and SGST rates (12%); implies additional tax burden

►Blocked input taxes are relatively more for State VAT since output tax rates are zero for most categories compared to Cenvat where Input Cenvat on goods and service tax on service inputs are both rebated

►Category-wise RNR is highest for ready made garments and artificial silk and synthetic fibre textiles


Page 17

Likely impact of GST

► If applied uniformly, GST is likely to address all concerns of industry

► It will eliminate any blockage of input taxes caused due to break of input tax credit chain

► Provide level playing field to all segments of textile industry

► Shift in tax burden from Production to Consumption (GST is a Consumption Tax)

► Significant simplification in compliance due to GSTN

► VAT rates on textiles in some international jurisdictions

► South Asia: Pakistan (5%), Bangladesh (15%), Sri Lanka (12%)

► Developed nations: Australia (10%), New Zealand (15%), Japan (5%, 8% from 1 April 2014 and 10% from 1 Oct 2015), UK (20%), Germany (19%), France (19.6%)

► China: 13%, 3% for SMEs without input tax credit


Page 18

Likely impact of GST

► Key concern – Increase in tax burden from 9.3% to possibly 12% which may lead to a reduction in demand

► However overall impact may not be negative

► Greater efficiency in production – may lead to downward movement of prices

► Exports may go up due to true zero rating

► A major reform like GST will lead to higher GDP and higher disposable incomes

► Price and Income elasticity of demand may compensate for each other


Page 19

Key effects of GST

If all textile categories are put at the lower CGST and SGST rates, key effects will be as follows: 1. Transparency effect

► Tax burden will be more transparent since blocked input taxes will be eliminated, all input taxes will be fully rebated

2. Automatic zero-rating of exports► Some of the present export-subsidy schemes

may need to be redesigned or eliminated; thus, exports will be encouraged under GST without the need for explicit subsidy schemes

3. Additional Revenue Effect► The overall tax incidence on textile products

will increase; the additional revenue can be used to redesign subsidy scheme for mitigating adverse impact on lower income groups; a distinction may need to be made between product groups where RNRs are close to the average and products where they are considerably lower


Page 20

Key effects of GST

4. Present zero-rating of textile outputs in the case of State VAT will go away and taxes paid on capital goods and textile machinery will also be rebated

5. Productivity Enhancing Effects; Improvement in allocative efficiency; modernization of textile sector encouraged

6. Improved Compliance Effect► With input tax credit at each stage of value added and

creation of information chain, there would be automatic improvement in compliance

7. Keeping the same GST rate for all textile segments will facilitate further experimentation in mixing and blending as it can be done without any tax implication

8. Present GST discussions indicate that cascading may continue with respect to petroleum products that serve as inputs; to that extent the burden on artificial silk and synthetic fibres will continue; since much of these products are exported, this disadvantage may continue unless a suitable mechanism is found to rebate input tax on petroleum products


Page 21

Policy Options under GST

► Key objective for options should be:► Production efficiency► Market Neutrality► Minimize incremental burden on lower-

income households► A uniform and comprehensive GST most

conducive for production efficiency and market neutrality

► Minimizing incremental burden on lower-income households is the remaining policy objective that could warrant deviation from a uniform GST

Page 22

Policy options

► Zero rating

► Exemption

► Lower rate of tax

► Standard rate of tax with appropriate subsidies


Page 23

Policy options- Pros and Cons

► Zero rating► Zero rating is possible only if all Input taxes are refunded

► Most jurisdictions find it difficult to administer and monitor input tax refunds

► Zero-rating in India proposed to be limited to exports

► Exemption► Most distorting option

► Results in higher tax incidence due to blocked input taxes and tax cascading

► Shifts tax burden from Consumption to Production

► Exemption to fabrics leads to pressure from industry for exemption from production inputs as well. This leads to complex administration of tax


Page 24

Policy options- Pros and Cons

► Lower rate of tax► Advisable only if government chooses to have a lower GST rate► Lower rate should be extended to all fabrics and personal wear items to

avoid classification disputes and market distortions► However, difficult choices to be made:

► Fabrics Vs Apparel for personal wear► Home textiles► Technical textiles

► If inputs are taxable at higher rate and outputs are taxable at lower rate, refund and monitoring of refunds issues will arise

► Standard rate of tax with appropriate subsidies► Clean tax system► Achieves production efficiency, which is the key concern as opposed to the

regressivity of the tax system► Can be accompanied by an appropriate subsidy regime to support weakest

segments of the textile industry


Page 25

Infirmities of the current Constitution Amendment Bill (CAB) relating to GST

► Imposition of a 1% tax on all inter-state supplies including branch/ stock transfers. Given the significant inter-state movement of textile inputs and outputs, this tax is likely to lead to significant tax cascading

► Treatment of various sectors► Alcohol for human consumption has been excluded from

GST. Will attract only state levies such as the State Excise Duty and Sales tax/ VAT

► Petroleum products such as Crude oil, Petrol, Diesel, Aviation Turbine Fuel (ATF) and Natural gas kept out of the GST for the time being, till such time the GST Council may decide. These products may be included in the GST base in the future

► Tobacco has been included in the GST. However, the Centre retains the power to levy an additional excise duty on tobacco

► Electricity is included in the GST. However, it may remain exempt under the GST and continue to attract the Electricity duty levied by the States. Possibilities of blockage of input taxes

► Under the CAB the scope of GST is limited to goods and services. While Goods mean “articles, materials and things”, Services has been defined as “anything other than goods”. It is not clear if these definitions will allow the government to levy GST on Real property. If excluded, it will give rise to significant cascading and lead to disputes about what constitutes Real property

Page 26

Duty drawback

► The duty drawback scheme, aims at promoting exports by seeking to rebate duty or tax chargeable on any imported/excisable goods and input services used in the manufacture of export goods

► The duties and tax neutralized under the scheme are ► Customs and Union Excise Duties in respect of inputs► Service Tax in respect of input services

► Two kinds of duty drawback are available currently:► All Industry Rate (AIR): It is a generic rate applicable to a

specific industry fixed as a percentage of FOB price of export product after extensive discussions with all relevant stakeholders including exporters

► Brand Rate: It is the rate at which the incidence of Customs, Central Excise duties and Service Tax is compensated by paying the amount actually incurred by the export product. It is allowed in cases where the export product does not have any AIR of Duty Drawback or the same neutralizes less than 4/5th of the duties paid on materials used in the manufacture of export goods

► Under the GST 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)

► The World Trade Organization (WTO) discourages export subsidies. Under the GST when exports will be automatically zero-rated, the duty drawback scheme would be perceived as an export subsidy, and may therefore be withdrawn

Page 27

Supplementary Slides

Page 28

Fractile Class

Basic Food

Processed Food

Fuel and light

Clothing &

beddingMedical

Other expenditur

eTotal

0-P5 52.2 7.0 11.4 6.8 3.0 19.5 100

P5-P10 50.8 7.8 10.5 6.3 3.6 21.0 100

P10-P20 48.7 7.5 9.7 6.2 4.2 23.7 100

P20-P30 46.8 7.6 9.0 6.2 4.3 26.0 100

P30-P40 45.0 7.7 8.6 6.0 4.5 28.2 100

P40-P50 42.0 8.2 8.1 6.0 4.6 31.1 100

P50-P60 40.8 7.7 7.5 5.8 5.5 32.7 100

P60-P70 38.1 8.3 7.1 5.7 5.5 35.3 100

P70-P80 35.3 8.6 6.7 5.4 5.6 38.5 100

P80-P90 31.6 8.9 6.1 5.2 6.0 42.2 100

P90-P95 26.7 9.7 5.6 5.2 6.4 46.4 100

>P95 16.4 11.5 4.1 4.2 6.4 57.5 100

All 33.6 9.0 6.7 5.4 5.5 39.8 100

Pattern of expenditure on essential items in Urban India- Share of Monthly per capita expenditure 2011-12


Page 29

Fractile class

Basic Food

Processed Food

Fuel and light

Clothing & bedding Medical Other

expenditure Total

0-P5 52.9 7.7 12.4 7.4 3.1 16.6 100

P5-P10 52.4 7.8 11.4 7.2 3.8 17.5 100

P10-P20 52.7 7.6 10.6 6.9 4.0 18.2 100

P20-P30 51.7 7.5 10.2 6.7 4.7 19.1 100

P30-P40 51.1 7.8 9.5 6.6 4.7 20.4 100

P40-P50 50.1 8.0 9.1 6.6 4.9 21.4 100

P50-P60 49.3 7.7 8.8 6.6 5.4 22.2 100

P60-P70 47.8 7.9 8.4 6.2 5.5 24.2 100

P70-P80 46.4 7.8 7.9 6.0 6.4 25.5 100

P80-P90 44.0 7.8 7.4 5.8 7.2 27.8 100

P90-P95 39.9 7.7 6.6 5.5 8.7 31.6 100

>P95 30.8 8.7 4.5 4.4 11.0 40.5 100

All 45.0 7.9 8.0 6.0 6.7 26.5 100

Pattern of expenditure on essential items in Rural India- Share of Monthly per capita expenditure 2011-12


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GST and the Indian Textile Industry 8 May 2015. Page 2 Taxes to be replaced by GST ► Main Taxes to be replaced are: ► Central taxes ► Central excise duties