The textile industry provides direct employment to 41 million individuals and generates 68 million indirect jobs for skilled and unskilled workers in the country. It contributes about 10% of the total annual export. With textile commodities holding a seven per cent weightage in the Consumer Price Index (CPI), it is a much sought after component of the Indian consumption basket. Its functioning, therefore, has a considerable ripple effect not only on the economy, but also on individuals.
As a concept, the goods and services tax is great but is likely to have significant negative impact on the domestic Indian textile industry. Firstly it has posed as a serious blow to an industry that was not expecting this tax regime. Secondly, the new indirect tax regime has made imports 20% cheaper, with significant gaps in the applicability of protective measures. Thirdly, GST has blocked working capital for exporters as they pay GST on exports first and then claim refund from the government. Fourth, the introduction of GST on cotton and synthetic fibre, which were previously untaxed is likely to increase prices and mute domestic demand. On balance, it is likely to be beneficial in the long-run by bringing this mostly informal industry under the tax net, and improving competitiveness by reducing the cascading effects of taxes.
The textile industry was not ready for the GST transition. Historically, a majority of this industry has relied on cash trading, and been centered in trade hubs like Surat, Bhiwandi, Bhilwara, Coimbatore, Tirupur, Erode and Ludhiana. These traders often pass on most of the savings to the end consumers and have been evading taxes. This transition has been challenging to this segment and can be better understood by focusing on the analogy of a 60-year-old man with a lavish carefree lifestyle who has been suddenly advised a radical change to his diet, exercise and essentially his weight management. While the long-term results seem effective and worth the effort, the short-term implications on him and his body will be unbearable and tasking. A gradual easing into the new lifestyle would have been a more accepting approach.
Under the new indirect tax regime of GST, imports have become more attractive than domestic production. The cost of imports for textiles has reduced by almost 20%. A simple 5% GST on textiles levy replaces the previous SAD (special additional duty), CVD (counter-vailing duty), education cess that together average about 20%. Furthermore, the GST can be taken as an input credit, reducing the overall tax liability of the importers. It has been recently informed that there are two top Indian apparel brands that are now aggressively shifting garmenting to Bangladesh from India, given this new tax advantage. The protective measures for the domestic industry have not been adequately addressed. In contrast the government was quick to slap an additional duty of 10% for mobile phones manufacturing to protect interests of an industry that has less than 0.1 million in employment.
Furthermore, we have blocked the working capital of textile exporters. For export sales, one has to make output GST payments similar to a domestic sale and thereafter claim the refund from the government. With the nuances and complexities associated with claiming a refund from the government, there is a need to submit multiple documents and is further dependent on the official validating the export.
Inspite of the challenges, GST is set to help this industry in the long run by getting more registered taxpayers under a well-regulated system. The GST rate for textiles will eliminate the cascading effect of taxes which will reduce the costs and improve the competitiveness of the textiles exports. It can also be hoped that GST will help the textile industry to get more competitive in both the global and domestic markets and create opportunities for sustainable, long-term growth.
Therefore, while there will be visible benefits of this new regime, given the size of the Indian textile industry and its undisputed contribution to the Indian economy, the whole changeover could have been handled in a more gradual manner. A stage wise implementation, thoughtful protective measures, a uniform GST rate and minimum slabs may have eased the pain of transition to a large extent. While one knows that the bitter pill must be swallowed for good health, downing it with a little honey would make it more agreeable.
Ramesh Kumar P Shah is the promoter of RK Group, an alumnus of Harvard Business School, and has imported and exported textiles in India since 1996
Sarabjit Ghose is the managing director of Laguna Clothing that employs more than 3,000 workers and is an alumnus of IIM Ahmedabad