Perfect Sourcing




The textiles and apparel industry in India accounts for about 10% of manufacture or production and 2% of India’s Gross Domestic Product (GDP) and constitutes about 13% of country’s export earnings. The industry is currently estimated at around US$ 108 billion and is expected to reach $ 223 billion by 2021. The textile industry has been enjoying various tax exemptions, benefits and concessions under indirect taxes. Textile and fabrics have been exempted from levy of VAT/ Sales tax in most states. Garments including textiles are being subjected to lower rates of VAT / Sales tax in many States. For example, in Karnataka, readymade garments and other articles attract a relatively low rate of 5.5% tax.

With the introduction of GST, a major change is expected in the Indian economy. However, the real impact of GST on the textile and apparel industry can be determined only after final rates are declared for the goods. Presently, most of the garment manufacturers opt for either complete excise duty exemption or payment at 2% duty without Cenvat credit benefit as most of the raw materials do not attract excise duty, especially in the case of the cottonbased sector.

Apparel Exports Poised to See Changes Once Gst is Implemented?

Textile exports from India for FY 2015-16 stood at around $ 40 billion and the Indian textile industry gets a good amount of duty drawback on export of garments. Duty drawback rates vary from 7 to 10% on FOB value of exports with cap limit varying from Rs.15 to Rs.620 when Cenvat credit benefits are not claimed. In the GST regime, duty drawback may lose relevance as there would be seamless credit at each stage of value addition and higher transparency. Even if duty drawback is continued to offset the impact of basic customs duty component, which is non-creditable tax, the drawback rate could be very low. This could impact largely companies that are dependent on duty drawbacks for achieving good margins / profits.

Exports would be zero rated supplies under GST with benefit of credits on goods and services procured. The accumulated credits could be claimed as refund within two years from the specified date. Due to better transparency, refunds could be faster in the GST regime. Based on the model GST law as updated in November 2016, 90% of the refund would be provisionally processed after filing of refund application subject to certain conditions. If this is executed by the Government, then it could solve the cash flow problem for the industry.

Credit on Capital Goods

Assessees who have plans for large investments in capital goods could plan for the same in the GST regime which would enable them to take credit of taxes paid on capital goods procurement for utilisation against payment of output GST. Assessees engaged in export of goods could opt for the Export Promotion Capital Goods (EPCG) scheme to procure the goods without payment of any duty. It is expected that the EPCG scheme under which export obligation of 6 times of duty saved amount has to be fulfilled within 6 years would continue in the GST regime as this is provided under the Foreign Trade Policy issued by the Ministry of Commerce.

Gst Rate and its Impact

The VAT/ sales tax would also be paid at lower rates or at concessional rates under composite schemes as applicable in different states. Exports have continued to be free from tax all these years. In the GST regime, most of the indirect taxes such as central excise duty, service tax, VAT / Sales tax and entry tax would get subsumed. For textiles and textile products, a GST rate of 12% is expected. If it is so, then it could have a negative impact as the industry is price sensitive.

Option of Tax Payment - Job Work in Gst

Even in the GST regime, the principal would get the option of sending inputs or capital goods for job work (Section 55 of Model GST law). Raw materials sent should be received back within 1 year and capital goods should be received back within 3 years. If the goods are not received within this time limit, then supply of goods would be treated as supply for levy of GST. The processed goods could also be sent directly to customers of principal, provided job workers are registered or the details of job workers placement are added as additional place of business in the principal’s registration certificate.

The procurements from unorganised sectors or from suppliers who opt for the composite scheme under GST could increase the cost of materials as such suppliers would not be eligible for any input tax credit. Therefore, the source of procurement would also play a vital role in the GST regime.

The principal manufacturers who have authorised the job workers to pay excise duty may be required to pay GST directly instead of authorising the job workers. However, when the goods are procured and supplied by job workers after processing, then the same would be treated as supply for levy of GST by job workers. Wherever the principal manufacturers are sending goods to job work units who are not required to be registered under the GST regime, such units are to be added as additional place of business in the principal’s registration certificate. It may be noted that the processing of goods sent by the principal would be treated as service for GST purpose. Job workers could choose GST exemption if the value of such services does not exceed Rs.20 lakh per annum. However, such option may not be feasible as it would break the input tax credit chain. The GST payment option could be a better choice as GST would provide seamless credit on goods and services. This would be beneficial even for the principal manufacturers. The job workers should be made aware of such an option and its impact.

Increase in Compliance Norms

All compliances including documentation would be automated in the GST regime. Input credit eligibility would be subject to tax payment and return filing by suppliers of inputs or services. Credits and liabilities would be matched online on monthly basis w.r.t. the various returns to be filed. As provided in the GST return-related reports released, there are 3 monthly regular returns to be filed in addition to one annual return followed by audit report. For distributing the credit of GST paid on common input services relating to units in multiple states, a separate return is prescribed (ISD return). Increase in number of returns could increase compliance costs in the form of additional time and staff recruitment. Matching may lead to the smaller unorganised sector facing challenges of survival itself as its buyer would not be interested in spending too much time on sorting out issues of credit denial.

Impact on Fabric Procurement

In case of the man-made fibre segment, most companies have been paying excise duty at regular rates along with VAT. Inputs such as polyster fibre, nylon and other petrochemicals suffer excise duty, which can be claimed as Cenvat credit. This segment may get a level playing field as the GST rate of 12% could have a positive impact on those who are already paying more than 12% tax. For this sector, seamless credit could also result in lower price of goods which could boost demand for non-cotton garments benefitting consumers by way of price reduction. It is expected that there can be a gradual shift in the domestic textile industry towards manmade fibres under the GST regime due to the tax advantage.

GST Levy on Supply

Unlike present indirect taxes, GST would be levied on supply of goods or services. Inter-state stock transfers between different units of an entity would be subject to GST. However, intra-state transfers would not be liable to GST unless separate GST registrations are to be obtained for different business verticals. This would have initial impact on cash flow. The receiving unit would be eligible for input tax credit of GST charged by the sending unit on goods sent. The level of stock to be maintained at warehouses, godowns, depots, etc., need to be decided considering this cash flow impact.

GST Implementation Cost

A shift to the GST regime from the present indirect tax regime would have a huge impact on the business. There is a need to analyse the impact on the entire business including main functions which would be helpful in ensuring preparedness for smooth transition to the GST regime. ERP systems would need customisation for compliance under GST. Key personnel vendors should be trained to understand the concept, impact and compliance requirement under GST. The Textile industry needs to be ready to meet this additional expenditure.

• Dependence on Job Workers

• The industry largely depends on job workers, who are not really organised to comply with a technology oriented law like GST

• Reduced Exemption Limits

• Under CE law, the exemption limit was Rs.1.5 crore, which has been reduced to Rs. 20 lakh in the GST regime. Hence the number of asssessees would increase.

Advantages and Disadvantages of GST

Introduction of Goods and Services Tax (GST) is a necessary step in the reformation of indirect taxation in India as it is converting several Central and State taxes into a single tax and it is expected to lighten the double taxation system thereby making the system smooth in a common national market. The simplicity of the tax should lead to easier administration and enforcement. From the consumer’s point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 30-35%, free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax and reduction in paperwork to a large extent. GST is expected to be applicable in India from 1st July 2017. However, there is a lot of confusion exacerbated by conflicting predictions about GST. Team Perfect Sourcing talked to the industry and analysed the impact of GST on textile sector.


• GST will be implemented in the middle of the year, around 1st July 2017. So, for the fiscal year 2017-18 business will follow the old tax structure for the first 3 months, and GST for the remaining 9 months. It is impossible to cross over from one tax structure to the other in just a day, and hence businesses will end up running both tax systems in parallel, resulting in more confusion and compliance issues.

• Registration in different states will also cause a major issue. GST requires businesses to register in all the states they are operating in. As the transporters who will transfer the goods to all these states of India will be asked to get registration done systematically, this will increase the burden of compliances for the officials to keep a hold an all distributors. This is no small task as, thousands of people export their goods around the country every day.

• A number of online sellers and E-Commerce traders will face problems under GST. Nowadays, many SMEs (Small and Medium Enterprises) operate through their own online shopping websites or through third party websites to sell to different parts of India. Under GST, they will be required to register for all the states. Moreover, they will not be eligible for a composite scheme and will be required to pay taxes like any large organisation. E-commerce facilitators are now required to collect TCS under GST which will lead to increased complications and hassles in compliance.

• Increase in taxes will also increase the prices of the products. Currently, some sectors like the textile industry are exempted from taxes or pay low tax. GST has only 4 proposed tax rates of 5,12,18 and 28%. Thus, for many sectors, the tax burden will increase, which in turn will increase the price of the final goods manufactured by the companies and sent to the retailers.

• There will be a higher burden for manufacturing on the SME’s. Small businesses in the manufacturing sector will bear most of the brunt of GST implementation. Under the existing excise laws, only manufacturing business with a turnover more than Rs.1.5 crore have to pay excise duty. However, under GST, the turnover limit has been reduced to Rs. 20 lakh, thus increasing the tax burden for many manufacturing SMEs as all the different taxes are also combined into a single tax under GST.


• All tax payers will be registered in an organised manner. All of their tax payments will be saved systematically so that government officials will have a proper record of all tax payers. It will have a big impact on the people who don’t pay tax and store it as black money which is a criminal offence under law. It is very necessary for the government to keep a record of their sales and supplies.

• It will combine all the state taxes and central taxes into one single tax. GST is an indirect taxation principle and would help replace most of the indirect taxes that are currently levied on the manufacturing and services sector. It will subsume both state as well as central taxes. Some of the Central Taxes that will get subsumed under the GST regime are Service Tax, Excise duty, Central and State tax followed by central surcharges and cesses whereas taxes on lottery, purchase, entertainment and luxury will also be integrated. From the consumer’s point of view, he will see a reduction in the overall tax burden on goods.

• Goods can be transferred easily from one state to another. The inter-state modification will be made by a focal clearing office and the assessees won’t be worried with such a change. Under GST, a merchant can set up centre and talk approach for dissemination of his last items. He can keep terminals at a couple of key areas in the nation and from those areas, he can convey merchandise to close-by states. This will be an exceptionally financially savvy arrangement for surveys. GST will make the inter-state supply of goods more flexible.

• There will be no discrimination between natural fibres and man- made fibres as both of them will be treated equally under the GST. It will also increase the wages of people who are working in the rural areas and producing man- made fibres. It is a presage of an increase in the manufacturing demand which will lead to employment and job opportunities for the working class youth.

• For the industry, compliance costs will be lower. All the import cost of raw materials will be reduced if GST is implemented successfully. For both large and small scale industries, production cost will decline which will lead to an increase in the sales growth and production sector. The industries can earn a good margin through it.

We can easily carry goods from Delhi and bring them to Greater Noida for sale. No issues of extra taxes as all the taxes are formed into one. It will be easy to transport inter-state and most importantly, no one will harass us now without any reason.

Kasna , Aar Fashion, Greater Noida.

I am an honourable tax payer and all my work has always been genuine. I only believe in earning white. It depends upon the rate of interest GST gets us. If we will earn from GST it will be beneficial otherwise it won’t be profitable

Nobinor Islam, Anisa Overseas, Greater Noida

GST is beneficial for bringing clothes into Rajasthan or exporting them outside the state. It will be helpful to us

Rakshit Poddar, Cheer Sagar Experts, Jaipur

I don’t think it will be very beneficial because the advantages are so far only in thought and nothing concrete is evident. Rest depends after the implementation of GST.

Naresh Kumar Sadh, AK Dyeing, Noida

Every businessman can’t afford large scale business, thus the Government has to be friendly with the taxes they set and should cooperate with people as per their situation. No business man should be harassed unnecessarily. The traders should focus on compliance and work hassle free.

Kamal D Mehta, Nutan Apparels, Mumbai

I expect it to be a beneficial scheme. The reduction of taxes will be a good advantage for the people whether customers or traders. It may get us a sort of relief. Once it starts, then we will be able to get into more detail about the Goods and Service Tax.

Raja Ramesh J Baig., Subbarow Apparels, Tamil Nadu

All of it depends on the government and what percentage of tax they put on the garment sector and exporting of clothes. The rest depends on the time of implementation and the way it effects the people of the country.

Naresh Malhotra, Kanha Design Pvt. Ltd., Delhi

GST will be beneficial for us as we will not have the need to pay everyone and we can work freely.

Gulam Haider Lone, Chinar Arts Emporium, Greater Noida

If we look at the previous work of the BJP Govt. like Swach Bharat Abhiyan, etc., they all were for the welfare of the people. So I expect GST to do the same i.e., welfare of the people. But in the last few years there has been an increase in the taxes in clothing business and now the government is combining all the taxes into one. So I don’t know what the final outcome would be.

Sohit S Sadh, True Fashion, Mumbai

I haven’t researched it completely but I expect it to be beneficial. I am hearing good reviews from the people and the rest depends on the final outcome, which will allow us get into more detail.

Amit Tanted, Vasu Lifestyles Pvt. Ltd., Madhya Pradesh.

As all the taxes will be combined into one, I think it will be beneficial for us as well as the customers.

Nitin Sharma, Aay Kay International, Noida