SEPTEMBER 27, 2018

By Brijesh Kothary, Principal Associate, Lakshmikumaran & Sridharan

TEXTILES are the second largest job provider in India, directly employing over 5 crore people. This sector accounts for 5% of India's GDP and 13% of its export earnings. As per the Vision Strategy Action Plan released by the Ministry of Textiles in July 2015, India should attempt a structural transformation whereby it becomes a net exporter of finished products by the year 2024-25, with a view to maximize employment generation and value creation within the country and fulfill the Prime Minister's vision of "Make of India".

The objective of Make in India initiative is to make India a manufacturing hub for key sectors, including textiles. It emphasizes on optimum utilization of India's highly talented and skilled manpower to create world-class zero defect products. The Government intends to boost the Indian manufacturing sector and bring it at par with the foreign manufacturers in terms of quality as well as cost of production. Therefore, localization of processes should be given priority over the processes that are completely outsourced or imported from outside India in fully finished form.

The vision of Textile Ministry and the objective of Make in India initiative go hand in hand to make India self-sufficient and self-reliant in achieving national goal of employment generation and value creation. This can be done by reducing reliance on imports and at the same time boosting the manufacturing sector by incentivizing domestic manufacturers. As against the above vision statement and objectives, here are some statistics regarding recent development in the sector:

- Export of apparel have plunged in the year 2017-18, with sharp fall of about 17%.

- The total textile imports have jumped by 16% to a record Rs.50,000 Crores in the year 2017-18, of which, about 43% were from China.

- India's import of textile goods from Bangladesh, which is the world's second largest exporter of textile goods rose over 43% to Rs.1,500 Crores in 2017-18.

- Rising imports has sent India's trade deficit in textile products to a record high of over Rs.11,000 Crores in 2017-18, in contrast with the fact that India had been a net exporter of textile products to China until recently.

- Import of manmade fabric, yarn and made-ups have increased by upto 27% and import of made-up staple fibres have gone up by 19% during April-July 2018.

Skewed import policy

The textile sector in India has been hit by cheaper imports. Fierce competition from the neighboring countries is forcing some businesses to run idle, leading to job losses and closure of weaving units. The goods imported under the Asia-Pacific Trade Agreement (Notification No. 72/2005-Customs, as amended) have affected the sector adversely, leading to reduction in overall scale of operations of manufacturers. Notification No. 50/2018-Customs dated 30.06.2018, superseding the above Notification has further reduced the rate of Customs Duty on various textile goods, as a result of which imported goods are being sold to end users at prices equivalent to the cost of manufacturing similar goods in India.

The Government has taken a trivial step to bring stability in textile sector by issuing Notification No. 58/2018-Customs dated 07.08.2018 to increase the rate of customs duty on import of certain textile products from 10% to 20%; however, the action to protect domestic manufacturers may not be adequate, considering the fact that articles of textile are spread across 14 Chapters (Chapter 50 to 63) of the Customs Tariff Act, 1975 and the increased rate of customs duty has no effect on the goods imported under the Asia-Pacific Trade Agreement.

During the 16 th GST Council meeting held on 11.06.2017, the issue relating to rate of tax on various goods were discussed and when the discussion regarding fixing the rate of tax on fishnet was taken up, the Joint Secretary (TRU-1), CBIC inter alia stated that if the tax rate on fishnet was reduced to 5% then fishnet would get imported in large quantities.

It is reported that China is exporting textile goods to India in large quantity and some of the goods are being routed through Bangladesh so as to dump the goods into India at low prices as well as at concessional rate of customs duty. This has an extremely adverse effect on the industry and the Government is expected to take some urgent steps to protect domestic manufacturers facing aggressive competition from China and Bangladesh. The subsidized imports not only distress the domestic industry, but also result in outflow of precious foreign exchange.

Distorted GST strategy

Textile sector has historically enjoyed exemption from payment of duties and taxes in India. The Government with a lot of determination has persuaded the sector to be a part of the formal economy by offering simple tax structure. However, it is reported that after implementation of GST in India, about 2.3 lakh small timers have shut their businesses due to compliance and cash flow problems, leading to large-scale job losses. The people affected in textile sector are typically power loom operators and weavers.

Textile goods other than cotton, silk and other natural fibre fabrics suffer inverted tax structure, wherein the quantum of unutilized Input Tax Credit (ITC, for brevity) is over twice as that of the quantum of tax outflow, on month-to-month basis. This results in blockage of working capital. The inverted tax structure also makes the products unviable in comparison with the imported goods that do not suffer high rate of tax.

The refund of accumulated ITC is being granted prospectively from August 2018. However, as a surprise package, the benefit would be restricted only to ITC on inputs, thereby imposing restrictions in claiming refund of ITC on input services, which may have to be factored in the cost of production. It is pertinent to note that the demand for recovery of amount refunded representing input services under Rule 89(5) of the CGST Rules has recently been stayed by the Hon'ble Gujarat High Court in - 2018-TIOL-2865-HC-AHM-GST.

In addition to the above, Notification No. 20/2018-Central Tax (Rate) dated 26.07.2018 proposes to lapse the unutilized ITC accumulated upto July 2018. It is interesting to note that the Union Finance Minister has made it clear that the Government has no intentions to block the ITC, but they only intend to block the refund of ITC accumulated before July 2018. The Ministry has however clarified in Circular No. 56/30/2018-GST dated 24.08.2018 that the amount of accumulated ITC to be lapsed must be entered in column 4B(2) of FORM GSTR-3B, with description "ITC amount to be reversed for any reason (other)". The amount reversed as per the procedure prescribed in the Circular may have to be foregone and the business cannot expect to claim it back in the future.

As against the above decision, the power loom weaving sector has made a number of representations before the Government with a request to reconsider the decision to lapse the unutilized ITC. Some businesses in Gujarat have even decided not to file GST return for the reason that lapsing of ITC would lead to a cascading effect on the sector.

Way forward

Taxation is the fuel on which the machinery of any economy functions. It is, therefore, reasonable for the Government to levy tax on any economic activity. The Government, on the other hand, must also take effective measures to protect the business against biased policies. The textile sector, which is trying to cope with stiff competition with foreign markets is additionally burdened with blockage in GST refunds, slow disbursements in Rebates on State Levies (RoSL) and the sharp decline in RoSL rates, which has led to erosion of working capital, particularly for exporters.

The following measures may, therefore, be deliberated upon and implemented, for faster revival of the sector:

- Increase the rate of GST on all varieties of textiles and fabrics other than those produced or manufactured in India from 5% to 18%, to boost 'Make in India' initiative;

- Impose Safeguard Duty on certain category of textile goods imported at very low prices;

- Increase the rate of basic Customs Duty on textile goods imported under the Asia-Pacific Trade Agreement;

- Introduce a Rule of Origin for import of textile goods at concessional rate of Customs Duty; and,

- Refund the input tax credit accumulated during the period July 2017 to July 2018.

The above measures would help India reduce reliance on the imports and at the same time boost the manufacturing sector by incentivizing domestic industry. These measures would also help in Government's initiative to revive the sector and bring it at par with the foreign manufacturers in terms of quality as well as cost of production. The recommendation on the above lines may also be made before the GST Council in the interest of improving the tax buoyancy and 'One Nation - One Tax - One Market' initiative.

(The views expressed in this article are strictly personal)