For the readymade garment sector, reeling under a slump for some time, things are rather looking up. A revival of exports during the current fiscal (2019- 20) is on the cards. The trigger is the recent announcement of a new scheme for rebating all Central and State embedded taxes levied on various inputs such as coal, electricity, fuel etc., that add to the cost of exports of garments and made-ups. Thus, a longstanding demand of the textiles and clothing industry has been met. In overall terms, the decision is expected to bring in an additional benefit of about 3.5 per cent to 4 per cent to the garment segment, as per the current reckoning. On the flip side, however, is that the scheme does apply to yarn and fabrics – critical sub sectors of the industry’s growth engine.
Called the Rebate of State and Central Taxes and Levies(ROSCTL), the Scheme, effective from April 7, 2019, will remain valid till March 31, 2020. The benefits under the scheme can be availed of along with duty drawback. It will be operated through a scrip system, similar to that of Merchandise Exports India Scheme (MEIS).
Going through details of the scheme, it is seen that for cotton T-Shirts. The new rate of rebate is 4.90 per cent up from 1.70 per cent before, those with blend it is 3.80 per cent from 1.16 per cent and for those with manmade fibre (MMF) it is 3.80 per cent from 1.16 per cent. In regard to night dress or cotton made apparel the new rate is 6.06 per cent against 1.45 per cent 4.93 per cent from 1.30 per cent for those of blend and 3.80 per cent from 1.16 per cent for those made of MMF.
As regards briefs, those of cotton made, the new rate is 4.90 per cent against 1.60 per cent earlier, those of blend it is 4.35 per cent against 1.38 per cent and for those of MMF, it is 3.80 per cent against 1.16 per cent before. The new rates under the advance authorisation scheme are 1.37 per cent and 1.08 per cent.
In a nutshall, the rebate applies to VAT on fuel used in transportation, captive power, manditax, electricity duty, embedded state GST paid on inputs such as pesticides, fertilizers used in the production of raw cotton. The rebate is also applicable to embedded Central GST and compensation cess on coal used to produce electricity, stamp duty on export documents, Central excise on fuel used for transportation, purchases from unregistered dealers and inputs for the transport sector.
On inclusion of fabrics under the new scheme as reported these columns earlier industry association argue that the segment suffers from high transaction cost, besides high interest rates unlike Chins. Their plea is for providing a 5 per cent rate for 5-7 years, noting that the blocked / embedded taxes / levies/ surcharge of about 5.33 per cent in the export consignments are not refunded at any stage. China gives a 17 per cent rebate on exports which, in effect, amounts to an implied subsidy for its fabrics of 8-10 per cent. Bangladesh grants a 5 per cent subsidy to its garment exporters, if fabrics are made from yarn sourced locally to promote the domestic value chain.
Indian cotton yarn has been losing out on exports because of taxes, as all taxes are not being refunded to exporters. The embedded taxes / levies which remain unadjusted account for about 7-8 per cent of the export price of yarn. Our competitors enjoy full tax refund. Even Vietnam and Bangladesh have preferential duty access to many large markets, putting India at a double disadvantage.
The MEIS is crucial for the cotton yarn industry as it helps it sell surplus production at competitive prices. It compensates the impact created by raw cotton cost and decrease in imports by China. Ideally, therefore the two per cent incentive under MEIS should be restored. As has been reported in these columns the advantage of two percent Incremental Export Incentive (IES) and Focus Market Scheme had helped the industry penetrate into alternate markets other than China (South America CIS Countries, far East Countries etc.) This also had helped in compensating for high transport cost involved in exports to such countries. These incentives were withdrawn in 2014 due to same inexplicable reasons. These should be restored.
Moreover, the high interest rates in India have forced spinning mills to maintain high inventory as China and Bangladesh buy yarn for 90-120 days L/C. The high amount of inventory requires higher working capital which needs to be financed by working capital loans.
On the export front, there is a reason to cheer. Cotton yarn exports rose by 8.57 per cent to $3255.87 mn in April – January 2019 from $2745.85 mn in the same period last year, as per the latest provisional estimates. These exports had been falling continuously since 2013- 14 with a decline in Chinese imports of the product. Moreover, Vietnam had emerged as a major competitor. It has attracted sizeable Chinese investment in its spinning segment. What is more, Beijing buys back yarn produced in Vietnamese factories. And no customs duty is levied by China on the yarn supplies.
There also exists an unfavourable duty structure. Indian yarn attracts higher rates of duty in Bangladesh and Pakistan, while they enjoy duty free access or concessional duty access in India. Pakistan has raised customs duty on yarn from 5 per cent to 10 per cent recently China too, has slapped a 3.5 per cent duty on Indian.
According to the Confederation of Indian Textile Industry, there are a few short comings which need to be addressed by the government to promote the industry’s growth. It is admitted that GST is the ambitious scheme for collection of taxes implemented by the government from July 2017. It is expected to eliminate the cascading effect of taxes, which used to trickle down to the end-consumers. A merchant has to pay tax only on the value addition of the product and allows manufacturers and retailers to reclaim input tax credit paid during the purchase of raw material, thus setting off the indirect tax burden.
CITI notes that a total of Rs. 9,303 cases of non-payment TUFS funds amounting to Rs. 6,000 crare pending which need to be resolved, which has deterred fresh investment in the industry. Another issue is the under performance of the amended TUFS. The disbursement under the scheme is less than Rs. 3 cr, covering only 30 beneficiaries at present.
On the manmade fibre (MMF) sector, CITI wants the GST rates on the fibre and other raw materials to be reduced from 18 per cent to 12 per cent and excess input tax credit to be refunded due to inverted duty structure of goods and supplies. There is also a need for continuation of GST exemption on capital goods imports under, the Export Promotion Capital Goods (EPGG) scheme.
At the same time, CITI welcomes the decision on integrated GST and compensation exemption under the advance authorisation scheme. Further, CITI notes that the comprehensive scheme for the development of knitting and knitwear sector will enhance the sectors contribution to the nation building. This is because it is one of the major segments of the textile value chain and contributes about 27 per cent of cloth production and about 15 per cent of knitted fabrics being exported, besides exports of knitted apparel. The share of knitted apparel, in value terms, is about 38 per cent of overall export of clothing. The main clusters to benefit are Tirupur, Kolkata, Ludhiana and Kanpur.
It is to be noted that the textiles and clothing sector has attracted. Investment to the tune of `3 lakh cr for expansion and modernisation in the last two decades. India has emerged as the world’s top producer of cotton. The industry is supported by a strong textile engineering sector, especially in short staple spinning machinery. It also has become the top exporter of cotton yarn in the world. Our vocational educational institutions such as the textile engineering institutions NIFT and textile research associations provide skilled human resources and R&D facilities to sustain the growth and improve competitiveness. Considering the importance of the textile industry several government policies, at macroeconomic and sectorial level, provide a conducive framework for improving the industry’s competitiveness.