7 Apr 2015 Taxes to be Replaced by GST Main Taxes to be replaced are Central taxes Central excise duties and Service tax along with all relevant cesses and surcharges State taxes State VAT Central sales tax and ID: 484478
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Slide1
GST and the Indian Textile Industry
7 Apr 2015Slide2
Taxes to be Replaced by GST
Main Taxes to be replaced are:
Central taxesCentral excise duties and Service tax along with all relevant cesses and surchargesState taxesState VATCentral sales tax andEntry tax
Implications of GST for Indian Textile IndustrySlide3
Main Advantages of GST
Indian Wide Common Market
Absence of Fiscal Barrier (CST/Entry Tax)Single or limited number of ratesProduction efficiency: Resource allocation; no incentive for vertical integrationConsumption efficiencyMinimization of classification disputesImproved complianceNote that the new constitutional amendment bill proposes a 1% tax on all inter-state suppliesSlide4
Key effects of GST
GST
Reform
Lower Price of Capital Goods
Larger Capital
Stock
Improved Resource Allocation
Higher Total Productivity
Improved Competitiveness
Higher
Potential Output
Implications of GST for Indian Textile IndustrySlide5
Features of GST in India
Dual GST: CGST
and SGSTDual rate structureLower rate: 12 % Standard rate: Estimates range from 20-27% for the composite rateExempt category
Exports zero-rated, imports taxable
Inter-state sales subject to IGST=(CGST+SGST)
Implications of GST for Indian Textile IndustrySlide6
Features of Textile Industry
Large unorganized sector
Large employment potentialMix of traditional and modernLow tax incidenceDifferentiated segments; composite productsHigh export contribution and potential Slide7
Share of Textiles in Potential GST Tax BaseSlide8
Key aspects of current taxation system as it applies to Textiles
Usually low/ zero rates of taxes on final products
Tax is shifted back to production (as opposed to consumption) leading to blocked input taxes and higher cost of productionInefficiencies in productionExemption of production inputs
Duty Drawback Scheme
Exemption by size of operation, giving rise to fragmentation of industry
Complexities in compliance and administration
Ad-hoc or piecemeal efforts to apply tax leads to significant opposition from all segments of textiles industry. Any piecemeal tax is complex, creates competitive distortions and is subject to collusion/ harassment by Tax Administration authorities
Implications of GST for Indian Textile IndustrySlide9
Key aspects of current taxation system
Classification disputes
Fabrics vs garments, e.g. should Sarees be treated as fabrics or as readymade garmentsLack of Fibre neutrality Cotton fibre vs manmade fibre. Cotton fibre treated favorably as compared to man-made fibres
Effective tax rates vary by degree of integration
Power looms vs Composite mills. Effective tax rates for composite mills higher than that of power looms discouraging integration of production adversely affecting efficiency
Implications of GST for Indian Textile IndustrySlide10
Textile
s
egments Nine broad categoriesKhadi and handlooms Cotton textiles Woollen textiles
Silk textiles
Artificial silk and synthetic fibre textiles
Jute, hemp, and mesta textiles
Carpet weaving
Ready-made garments
Miscellaneous textile products
Implications of GST for Indian Textile IndustrySlide11
Key concerns of textiles industry
Break in input tax credit chain leads to blocked input taxes
Complexities and distortions related to Small Business ThresholdHigh compliance cost, especially for small unitsLack of uniformity in Centre and States taxes: e.g., presently Job Workers are treated differentially under CENVAT and State VATContinuing blockage of input taxes under GST – Petroleum products, Electricity, Real estate
Possibility of some the taxes continuing after GST: e.g. Octroi
, Entry
tax, Electricity duty
Implications of GST for Indian Textile IndustrySlide12
Estimated share of textile segments in tax base
Textile Outputs
Relative Shares in Estimated GST Tax Base (%)
Khadi, cotton
textiles (
handlooms)
1.2
Cotton textiles
39.5
Woollen textiles4.3
Silk textiles1.6Art silk, synthetic fibre
textiles18.7Jute, hemp, mesta textiles
0.8Carpet weaving1.0Readymade garments
16.3Miscellaneous textile products16.6Total
100.0
Implications of GST for Indian Textile IndustrySlide13
Input structure across the nine textile categories
- Shares by types of inputs
Structure of Inputs
Khadi,
cotton
textiles (
handlooms)
Cotton textiles
Woollen textiles
Silk textiles
Art silk, synthetic fibre textiles
Jute, hemp, mesta textilesCarpet weaving
Readymade garments Miscellaneous textile products
Synthetic fibres, resinTextile inputs46.3
52.1
45.1
38.7
40.6
38.442.2
47.1
41.3
14.1
Non-textile inputs (goods)16.2
11.9
19.5
25.2
28.4
19.5
19.9
16.5
23.4
58.4
Non-textile inputs (services)
36.5
34.2
33.9
35.0
29.7
39.6
36.7
35.3
33.6
22.4
Total Non-textile inputs
52.7
46.1
53.4
60.2
58.1
59.0
56.651.957.080.7Non-textile inputs (not shown)1.01.81.41.01.32.51.21.01.75.2Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Implications of GST for Indian Textile IndustrySlide14
Current Effective Tax Rates (RNR)
-
Combined for Centre and StatesTextile Categories
RNR (%)
Khadi, cotton textiles (handlooms)
4.0
Cotton textiles
7.1
Woollen textiles
9.3
Silk textiles
9.6
Art silk, synthetic fibre textiles10.2Jute, hemp, mesta textiles
9.0Carpet weaving5.6
Readymade garments*
10.5
Miscellaneous textile products12.0
All Segments
9.3
Implications of GST for Indian Textile IndustrySlide15
Category
Base price
Base+ Present Taxes
Base+GST
Increase in price (%)
Change in demand (own price relative to all prices effect) (%)
Change in demand (income effect (%)
Net Change in demand (%)
Khadi, cotton textiles (handlooms)
100
104.0
112
7.7%
-2.2%0.8%-1.4%
Cotton textiles100
107.1
112
4.6%
-1.3%
0.8%-0.5%
Woolen textiles
100
109.3
1122.4%
-0.7%
0.8%
0.1%
Silk textiles
100
109.6
112
2.2%
-0.6%
0.8%
0.1%
Art silk, synthetic fiber textiles
100
110.2
112
1.6%
-0.5%
0.8%
0.3%
Jute, hemp, mesta textiles
100
109.0
112
2.8%
-0.8%
0.8%
0.0%Carpet weaving100105.61126.1%-1.7%0.8%-1.0%Readymade garments 100110.51121.4%-0.4%0.8%0.4%Miscellaneous textile products100112.01120.0%0.0%0.8%0.7%Total
100
109.3
112
2.5%
-0.7%0.8%0.0%
Price and Income Effects- Net effect on demand due to a shift to GST from the current indirect tax structure
Assumption: GST is levied at a single rate of 12%Slide16
Key empirical findings
Overall current RNR lower than the sum of lower CGST and SGST rates (12%); implies additional tax burden
Blocked input taxes are relatively more for State VAT since output tax rates are zero for most categories compared to Cenvat where Input Cenvat on goods and service tax on service inputs are both rebatedCategory-wise RNR is highest for ready made garments and artificial silk and synthetic fibre textiles
Implications of GST for Indian Textile IndustrySlide17
Likely impact of GST
If applied uniformly, GST is likely to address all concerns of industry
It will eliminate any blockage of input taxes caused due to break of input tax credit chainProvide level playing field to all segments of textile industryShift in tax burden from Production to Consumption (GST is a Consumption Tax)Significant simplification in compliance due to GSTN
VAT rates on textiles in some international jurisdictions
South Asia: Pakistan (5%), Bangladesh (15%), Sri Lanka (12%)
Developed nations: Australia (10%), New Zealand (15%), Japan (5%, 8% from 1 April 2014 and 10% from 1 Oct 2015), UK (20%), Germany (19%), France (19.6%)
China: 13%, 3% for SMEs without input tax credit
Implications of GST for Indian Textile IndustrySlide18
Likely impact of GST
Key concern – Increase in tax burden from 9.3% to possibly 12% which may lead to a reduction in demand
However overall impact may not be negativeGreater efficiency in production – may lead to downward movement of pricesExports may go up due to true zero ratingA major reform like GST will lead to higher GDP and higher disposable incomes
Price and Income elasticity of demand may compensate for each other
Implications of GST for Indian Textile IndustrySlide19
Key effects of GST
If all textile categories are put at the lower CGST and SGST rates, key effects will be as follows:
Transparency effectTax burden will be more transparent since blocked input taxes will be eliminated, all input taxes will be fully rebatedAutomatic zero-rating of exportsSome of the present export-subsidy schemes may need to be redesigned or eliminated; thus, exports will be encouraged under GST without the need for explicit subsidy schemes
Additional Revenue Effect
The overall tax incidence on textile products will increase; the additional revenue can be used to redesign subsidy scheme for mitigating adverse impact on lower income groups; a distinction may need to be made between product groups where RNRs are close to the average and products where they are considerably
lower
Implications of GST for Indian Textile IndustrySlide20
Key effects of GST
Present
zero-rating of textile outputs in the case of State VAT will go away and taxes paid on capital goods and textile machinery will also be rebatedProductivity Enhancing Effects; Improvement in allocative efficiency; modernization of textile sector encouraged
Improved Compliance Effect
With
input tax credit at each stage of value added and creation of information chain, there would
be
automatic improvement in
compliance
Keeping the same GST rate for all textile segments will facilitate further experimentation in mixing and blending as it can be done without any tax implicationPresent GST discussions indicate that cascading may continue with respect to petroleum products that serve as inputs; to that extent the burden on artificial silk and synthetic fibres will continue; since much of these products are exported, this disadvantage may continue unless a suitable mechanism is found to rebate input tax on petroleum products
Implications of GST for Indian Textile IndustrySlide21
Policy Options under GST
Key objective for options should be:
Production efficiencyMarket NeutralityMinimize incremental burden on lower-income householdsA uniform and comprehensive GST most conducive for production efficiency and market neutralityMinimizing incremental burden on lower-income households is the remaining policy objective that could warrant deviation from a uniform GSTSlide22
Fractile
Class
Basic Food
Processed Food
Fuel and light
Clothing & bedding
Medical
Other expenditure
Total
0-P
5
52.27.0
11.46.8
3.019.5100
P5-P
1050.8
7.8
10.5
6.3
3.621.0
100
P10
-P20
48.77.5
9.7
6.2
4.2
23.7
100
P
20
-P
30
46.8
7.6
9.0
6.2
4.3
26.0
100
P
30
-P
40
45.0
7.7
8.6
6.0
4.5
28.2
100P40-P5042.08.28.16.04.631.1100P50-P6040.87.77.55.85.532.7100P60-P7038.18.37.15.75.535.3100P70-P8035.3
8.6
6.7
5.4
5.6
38.5100P80-P
9031.68.9
6.1
5.2
6.0
42.2
100
P
90
-P
95
26.7
9.7
5.6
5.2
6.4
46.4
100
>P
95
16.411.54.14.26.457.5100All33.69.06.75.45.539.8100
Pattern of expenditure on essential items in Urban India- Share of Monthly per capita expenditure 2011-12
Implications of GST for Indian Textile IndustrySlide23
Policy options
Zero rating
Exemption Lower rate of taxStandard rate of tax with appropriate subsidies
Implications of GST for Indian Textile IndustrySlide24
Policy
options
- Pros and ConsZero ratingZero rating is possible only if all Input taxes are refundedMost jurisdictions find it difficult to administer and monitor input tax refunds
Zero-rating in India proposed to be limited to exports
Exemption
Most distorting option
Results in higher tax incidence due to blocked input taxes and tax cascading
Shifts tax burden from Consumption to Production
Exemption to fabrics leads to pressure from industry for exemption from production inputs as well. This leads to complex administration of tax
Implications of GST for Indian Textile IndustrySlide25
Policy options
- Pros and Cons
Lower rate of taxAdvisable only if government chooses to have a lower GST rateLower rate should be extended to all fabrics and personal wear items to avoid classification disputes and market distortionsHowever, difficult choices to be made:
Fabrics
Vs
Apparel for personal wear
Home textiles
Technical textiles
If inputs are taxable at higher rate and outputs are taxable at lower rate, refund and monitoring of refunds issues will arise
Standard rate of tax with appropriate subsidiesClean tax system
Achieves production efficiency, which is the key concern as opposed to the regressivity of the tax systemCan be accompanied by an appropriate subsidy regime to support weakest segments of the textile industryImplications of GST for Indian Textile IndustrySlide26
Supplementary SlidesSlide27
Fractile
class
Basic Food
Processed Food
Fuel and light
Clothing & bedding
Medical
Other expenditure
Total
0-P
5
52.97.7
12.47.4
3.116.6100
P5-P
1052.4
7.8
11.4
7.2
3.817.5
100
P10
-P20
52.7
7.610.6
6.9
4.0
18.2
100
P
20
-P
30
51.7
7.5
10.2
6.7
4.7
19.1
100
P
30
-P
40
51.1
7.8
9.5
6.6
4.7
20.4
100P40-P5050.18.09.16.64.921.4100P50-P6049.37.78.86.65.422.2100P60-P7047.87.98.46.25.524.2100P70-P80
46.4
7.8
7.9
6.0
6.425.5100P
80-P9044.0
7.8
7.4
5.8
7.2
27.8
100
P
90
-P
95
39.9
7.7
6.6
5.5
8.7
31.6
100
>P
9530.88.74.54.411.040.5100All45.07.98.06.06.726.5
100Pattern of expenditure on essential items in Rural India- Share of Monthly per capita expenditure 2011-12Implications of GST for Indian Textile IndustrySlide28
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