Heeding to demands from states, including the polls-bound ones, the Goods and Services Tax (GST) Council held an emergency meeting on Friday and virtually rolled back a decision taken in its September meeting to increase the GST rate on textile products from 5% to 12%. But a similar rate hike for certain footwear will take effect from Saturday as planned.
A group of ministers (GoM), which is currently reviewing the entire GST rates structure, would revisit the issues with regard to the textiles value chain and submit its report in February, Union finance minister Nirmala Sitharaman, the chairperson of the council, said after its 46thmeeting here.
While the rate increases were meant to correct the long-unresolved issue of inverted duty structure in the synthetic textiles value chain, it met with opposition from the industry. A structure where inputs are subjected to higher taxes than finished products results in accumulation of tax credits with the downstream players. India’s competitiveness in the global textiles market, where synthetic textile products have a much larger share than cotton-based products, is seen to be blunted, owing to the inverted tax system. A GoM had earlier proposed the rate increases, keeping this in view, but several states and the fabrics-to-garments industry, which include thousands of MSMEs and tiny units, opposed this move as they saw it leading to a demand compression.
Sitharaman said: “A committee is already looking at rates rationalisation. The (issue of) textiles will again be put to the committee for review, which will submit a report by February. In the (subsequent) Council meeting, the recommendations of the group will be discussed.”
At present, tax rate on man-made fibre, yarn and fabrics is 18%, 12% and 5%, respectively. To illustrate, GST rate is 18% on mono-ethylene glycol (MEG) and purified terephthalic acid (PTA), the building blocks; 12% on polyester partially oriented yarn (POY) and 5% on grey fabrics, finished fabrics and garments. Natural yarns like cotton, silk and wool are in the 5% slab.
At present, footwear up to `1,000 a pair attracts 5% GST and costlier ones attract 18%. The price differential has now been done away with; all footwear will now attract 12% GST.
The proposed rate hikes on textiles, which would have brought uniformity in the taxation of products in the textiles value chain, was opposed by several states including Tamil Nadu, Rajasthan, West Bengal and even the BJP-ruled Gujarat. “The rise in tax rates would have increased the financial burden on already-stressed MSME textiles and handloom sectors,” Tamil Nadu finance minister Palanivel Thiaga Rajan said.
The Council had earlier asked the seven-member GoM on GST rate structure led by Karnataka chief minister Basavaraj S Bommai to suggest measures to rationalise GST rates. As the GoM’s tenure ended on November 27, it was given a one-month extension and now it has been asked to submit the report in February. The Council will likely meet in early March to consider the group’s recommendations.
As reported by FE earlier, many state governments on Thursday asked for extension of the revenue compensation mechanism for states under the GST for another five years from June 2022.
On most state governments likely facing a revenue shock due to the scheduled expiry of the GST compensation period on June 30 next year, Union revenue secretary Tarun Bajaj had earlier cited an absolute absence of resources for extension of the mechanism, but said augmentation of GST revenues through rationalisation of the rates structure and improved compliance would likely ameliorate the situation.
Meanwhile, a process of formalisation of the economy – thanks to the spurt in digital transaction and steps taken by the government to improve compliance — has boosted GST receipts in recent months. Gross GST collections came in at `1,31,526 crore in November (October sales) 2021, the second-highest mop-up in the history of the comprehensive indirect tax that was launched in July 2017.