Ever since the goods and services tax (GST) council has proposed to change the GST rate on textile and apparel from 5% to 12%, apparel manufacturers are in jitters, and have raised red flags over an adverse impact on the industry time and again. This will particularly affect the demand for affordable clothing because apparel above Rs 1,000 was already taxed at 12% whereas that below Rs 1,000 — which is widely sold was taxed at 5%. With the proposed revision, affordable garments will become costlier, and manufacturers fear that it will not just impact domestic demand in a big way but in turn even hit production. 

Industry leaders express fear that the government’s plan to increase revenues through higher GST will backfire and will bring down the tax collection from current levels. 

Several representations have been made by industry associations comprising retailers, apparel makers and textile industry stakeholders urging the government to revoke the proposed change in the GST rate. Despite concerns expressed by the industry, the Union government is unlikely to defer implementation of the higher GST rate on certain textile products, as the decision was taken by the GST council, according to the Union finance ministry. 

"A delegation of the textile industry from the city tried to explain to the government about the adverse impact. Around Rs 4,500 crore has been invested for upgradation by the industries here and the hike in GST will give a major blow to them," said Bharat Gandhi, chairman, Federation of Indian Art Silk Weaving Industry (FIASWI). 

"Textile products are even for poor people. The hike in taxes will make the products costly by 20%," Gandhi added. 

Manufacturers, retailers fear decline in demand 

Clothing manufacturers and retailers fear that costlier apparel will cause a decline in demand for apparel. "The cost of apparel has already gone up by a sizeable 20-25% since Diwali in the wake of costlier raw materials and increased job work charges. With a surge in GST rates, there will be a further increase in the price of apparel, particularly those in the affordable segment," said Arpan Shah, honorary treasurer, Gujarat Garment Manufacturers’ Association (GGMA). "Costlier apparel will dent demand because the purchasing power of consumers has not dramatically improved over the past year and a half. We saw good demand during Diwali purely due to the festive season and pent-up demand, and post that, there is already a reduction in demand," said Shah. 

Slowing demand likely to affect employment 

During the Diwali festive season, apparel makers did good business fuelled by pent-up demand. Estimates by Clothing Manufacturers’ Association of India (CMAI) suggest that most retailers earned 90% of their festive season revenues during pre-Covid period. "Already with rising cases of Covid-19 and concerns over the Omicron variant, the consumer sentiment has dampened yet again with retail sales declining. At a time when industry was barely recovering from the pandemic-induced slowdown after a year and a half, a rise in taxation and costlier commodity will only derail this recovery further," said Rahul Mehta, chief mentor, CMAI. In fact, a study commissioned by CMAI projects that some 7 lakh jobs in the textile and apparel industry across the country will be lost over the next year if the tax rates go up. Industry players have also voiced concerns over unfair competition from players who are not under the ambit of GST. "The idea behind introducing the new tax rate was to give relief to textile industry players from an inverted duty structure. However, as per our findings, only 20% of the industry is impacted by an inverted duty structure and such a decision to increase tax rate will prove detrimental for 80% of the industry," Mehta further added. 

Plunging demand may hit production 

Textile and apparel makers suggest a decline in apparel demand is expected to impact production in turn as well. Estimates by GGMA suggest that garment makers are already operating at 60% of the production capacity since Diwali. "With fewer sales, the production cycle will also be impacted to a great extent. With fresh concerns over Omicron variant, export order volumes may take a hit and it will be a double whammy for manufacturers if domestic demand also further declines," said Chintan Thaker, chairman, Assocham Gujarat State Council. Industry estimates suggest that textile production may drop by 30% in the wake of reduced demand and increased working capital needs. 

Retailers to take a big blow 

Market insiders explain that the impact of the tax hike will be maximum on traders and retailers. Retailers sell products at competitive rates with a margin of 2-5% net profit and with the hike in tax they will be most impacted. "Small businesses will face tough situations as they need investment to buy products and pay taxes in advance while they get payment as per the credit cycle. All textile traders’ associations across India have opposed the hike," said Champalal Bothra, general secretary, Federation of Surat Textile Traders Association (FOSTTA). "The textile products have already become costly due to rising costs and with an increase in tax will result in scared customers," said Sanjay Mehta, a fabric shop owner in Jhabua of Madhya Pradesh. Working capital need may go upIndustry stakeholders also warned of the dumping of cheaper textile products from neighbouring countries. The most common worry of all segments of the industry is the requirement of working capital. "We have a credit and payment cycle up to five months. A weaver or trader will have to pay GST for the same month, but one will get paid after three months or more. To avoid blocking a big amount they will reduce the size of business or start evading tax," said Ashok Jirawala, president, Federation of Gujarat Weavers Welfare Association (FOGWA).