5% GST for Cotton, Yarn, 12% for High-End Clothes

The GST Council's announcement of rates for the textiles industry was met with a sense of relief on Saturday, although prices of garments over Rs 1,000 will rise marginally. The council announced a tax of 5% for yarn and cotton, and ready-made garments below the Rs 1,000 mark. For garments above Rs 1,000, the tax rate has been fixed at 12%.

Rahul Mehta of the Clothing Manufacturers Association of India said, "The rates are satisfactory, especially as they have removed the fragmentation in the industry. It's been kept largely at 5%, with no confusion between types of fibre, though we are not too happy with the 12% tax on garments above Rs 1,000." According to Mehta, the impact of the latter tax won't be significant. "The rates will remain static in the lower price category of garments, with increase of a percent or two in the higher category," said Mehta.

He added, "Though there is no excise tax on ready-made garments, the industry was still paying VAT of 5.5-6% and 7-7.5% for garments above Rs 1,000. The difference in tax rate will get offset, more or less, by embedded tax credit."

Siddharth Bindra of Biba agrees. "Getting the entire value chain under the tax net is commendable, and a landmark move," said Bindra, adding that the higher tax rate for ready-made garments above Rs 1,000 was not likely to have a significant impact. "Most companies will be able to absorb the impact."

The industry had been asking for a uniform tax slab of 5%. "The impact is not only on consumers but also on millions of workers," explained Mehta.

Sajjanraj Mehta, trade activist and former president of Karnataka Hosiery and Garment Association said there would be much confusion and the gain will be restricted to innerwear with prices of most ready-made garments and fabrics set to rise. At present, the total output taxes from the sector is estimated to be around Rs 3,400 crore. "Under a tax rate of 5%, the government would still be netting a three-fold rise in taxes, to the tune of Rs 10,000-11,000 crore," added Mehta.

Atul Mishra, economist with the Confederation of Indian Textile Industry says the industry's value chain, which is "extremely" fragmented at present, will benefit from a uniform tax rate. "A low and uniform GST would lead to the creation of a unified textile industry. Its simplicity will lead to better compliance across the sector."

Textile industry is the second largest employer in India after agriculture. It directly employs 50 million and indirectly up to 60 million people.