From Jan. 1, a uniform goods and services tax of 12% will be imposed on man-made fibre and readymade garments even as the textile industry is worried that it will increase prices, hurt demand and cause job losses.

In several representations to state and central governments, traders’ associations from across the country had recommended lowering GST rates. Their argument: it could hurt when the industry was just starting to recover from the Covid-19-led disruptions. 

The Textile Ministry, however, said in a Dec. 27 statement that the uniform 12% rate will help the man-made fibre or MMF segment emerge as a big jobs provider in the country, it said.

A uniform rate on MMF, MMF yarn, MMF fabrics and apparel would also address the inverted tax structure—a higher rate on raw materials than on finished goods—in the textile value chain, it said. Man-made yarn and fibre is taxed at 2-18% compared to 5% GST on fabric.

While an inverted tax structure can create problems for traders in getting input tax credit, it comprises just 15% of the entire value chain, Rahul Mehta, chief mentor of the Clothing Manufacturers Association of India, told BloombergQuint. 

Mehta expects the hike to adversely impact 85% of the industry. "It’s unfortunate that the central government is putting more stress on the industry which is still recovering from lost sales and higher input costs for the past two years.”

Traders said the hike will pinch consumers who purchase clothes for less than Rs 1,000. A shirt worth Rs 800 already sells for Rs 966, including a 15% increase in raw material prices and 5% GST. The consumer will now have to pay an additional Rs 68 from January as the GST will rise by 7 percentage points.

The CMAI, like many other protesting lobbies, said the higher rate will either hurt consumption or force consumers to buyer cheaper and lower-quality goods.

The Confederation of All India Traders wrote a letter to Finance Minister Nirmala Sitharaman, asking her to defer the new GST rates. The higher taxes will not only add to the financial burden on consumers, but also manufacturers who would require more funds to run businesses, said the Dec. 27 letter—BloombergQuint has reviewed a copy. 

“Increasing the tax at this point in time is illogical given that domestic trade is on the verge of recovery from the colossal damage caused due to the last two spells of Covid-19,” wrote Praveen Khandelwal, CAIT national secretary general. The Indian textile industry will also find it difficult to compete with peers in countries like Vietnam, Indonesia, Bangladesh and China, he said.

Job Losses Fears

The textiles sector is estimated to be worth close to Rs 5.4-lakh crore, of which about 80-85% comprises natural fibres such as cotton and jute, according to a CMAI study. The sector employs 3.9 crore people. 

The CMAI estimates that the higher GST rate will result in 7-10 lakh direct job losses in the sector or would push lakhs of medium and small businesses into the unorganised sector. 

Nearly one lakh small and medium-sized enterprises may face closure due to working capital pressures, it said. The handloom sector, the study said, may see up to 25% income loss.

States' Support

According to Mehta, there is a “fair deal of support” from the states. “We expect the [state] governments will raise the issue of the new GST rates in their upcoming pre-budget consultations with the FM on Dec. 30,” he said.

So far, Karnataka, West Bengal, Telangana, and Gujarat have sought a GST Council meeting at the earliest, and reversal of the proposed hike. "We remain hopeful that our demands will be heard."

The annual GST collection from the Indian apparel textile industry is estimated at Rs 18,000-21,000 crore, according to the CMAI. The cash strapped-Centre, it said, is likely to earn just Rs 7,000-8,000 crore in additional revenues per year because of the new GST rate.

They would continue to be talk to the government, Mehta said. “Is it worthwhile given its impact on employment and clothing inflation? A uniform GST of 5% would be the right way forward.”