GST on Textiles in India: Who will Bell the Cat?

Code : FAC0066

Year :

Industry : -

Region : Asia

Teaching Note:Available

Structured Assignment : Not Available

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Introduction: Though textiles had been under the purview of the Goods and Services Tax (GST) implemented by the Government of India (GoI) since 2017, the tax rates on the inputs and outputs of this industry had differed since its inception. The tax rates on inputs and outputs resulted in an inverted duty structure where the excess amounts of input tax credit (Refer to Exhibit I) that had accumulated had to be refunded by the GoI to the tax payers. Further, the GST Council at its 45th meeting in September 2021..

Background of GST: The complex and complicated indirect tax structures that had been prevailing in India for decades needed a drastic change for the country to progress. Hence, the GoI proposed the historic indirect tax reforms in India way back in 2003-04. It took almost a decade and a half to implement a single tax for the nation..

Textiles Industry in India : Being the oldest industry in India and one of the most significant contributors to the country’s GDP – 2 percent – the labour-intensive textiles industry employed about 45 million people in 2020, directly and indirectly. India was the third largest exporter (4.2 percent) of textiles in the world, which contributed 12 percent..

Tax Rates In Textiles – Pre and Post : The indirect tax structure in India consisted of three significant taxes – Central Excise, Sales Tax, and Service Tax. The GoI kept the textiles industry out of the purview of the Central Excise for several decades to increase production and exports..

GoI’s Concern : Most of the inputs on which GST was levied in the textile industry had a higher rate of tax than the tax levied on the outputs (Refer to Exhibit VI). This led to a situation called “inverted duty structure” where the higher taxes on inputs created an accumulation of input tax credit. Due to this, the registered taxpayers could not claim the accumulated input..

The Concerns of The Industry And Consumers : The major concern raised by the industry and consumers pertained to the higher compliance costs, particularly for the unorganized segment and the micro, small, and medium enterprises (MSMEs). Clothing was also expected to become more..

Road Ahead : The GoI would benefit from an increase in revenue by Rs.70 to Rs.80 billion. The implementation would also eliminate the inverted tax structure on textiles by implementing a common rate on the entire supply chain of the textile industry..


Exhibit I : Concept of Input Tax Credit
Exhibit II : Share in world exports of the leading clothing exporters in 2020 by country
Exhibit III: Market size of Textiles Apparel Industry
Exhibit IV: Industry Composition
Exhibit V: Tax rates in the GST era
Exhibit VI: Rate of Tax on Input and output
Exhibit VII: Goods Covered under Notification
Exhibit VIII: Proposed GST rates

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