The textiles and clothing (T&C) Industry had not set much store in the Budget for 2017-18 with the Goods and Services Act (GST) about to be implemented from July 1 next. But it turned out that there are proposals in the Budget that seek to confer benefits on the garment sector making its operations economically viable. One of these is the reduction in the corporate taxes to 25 per cent for small companies with a turnover of Rs. 50 cr. This provision will cover a large number of garment units since the industry is mostly in the Small and Medium (SME) Sector. The reduction in the tax rate will result in more resources at the disposal of the SME sector which can be deployed for further development, apart from additional revenue accruing on domestic sales and exports.
There is also a proposal to scale down the individual income tax rate by 50 per cent from ten per cent to five per cent. This applies to individuals with incomes ranging from Rs. 2.5 cr to Rs. 5 cr. In addition, the Budget’s focus and the extra allocations for agriculture and rural sectors will improve the purchasing power of rural poor who form a large chunk of the clientele of unorganised and small garment makers.
The Budget also seeks to establish 100 India International Skill Centres and the garment industry will be a major beneficiary of this move as mobilising skilled workers is a major challenge of the industry. Increased allocations have been made for several schemes, including the Textile Upgradation Fund Scheme (TUFS) and a special apparel package.
The Finance Minister has also allowed the continuation of the “optional” excise duly for textile until the introduction of GST. While welcoming this move the T and C sector wants the GST rate to be pegged at 5 per cent for all textile products without any exemption for any groups or segments in order to ensure proper and equitable implementation of the Scheme. The optional excise duly on inputs extends up to the fabrics stage. The industry can take credit of the duly paid on the inputs.
In the 2014-15 interim Budget, the excise on automobiles was reduced, pushing up the demand for vehicles. This provided indirect benefits to the T and C sector as automobiles use textiles for their interiors.
The 2017-18 Budget has no favourable tax regime for the Man-Made Fibre (MMF) segment of the textile industry. This is because of the likely roll out of the GST scheme from July 1 next. What sort of duties will be applied on the MMF segment will be known only then. Needless to say, the textile industry is hopeful that revised tax rates for MMF will enable it to use more MMFs and reduce dependence on cotton, a natural fibre. This part, the intention also is to fall in line with the prevailing practice worldwide in the usage of cotton vis-à-vis synthetic fibres which is 40:60. The ratio in India is 57:43. Pronouncements used to be made by the government on the need to reduce dependence on cotton and to encourage usage of more MMFs by the textile industry. But these are yet to be taken to their logical conclusion, through acknowledging the fact that GST roll out is expected in the next four months and any revision of duty structure will have to await till then.
The customs duty on MMFs now stands at five per cent. There is also a 4 per cent special additional duty and an excise duty equivalent to 12.5 per cent. This brings the total duty incidence to 22 per cent. The fact remains that a handful fibre makers believe that imported fibres is cheaper than indigenous ones, even after taking into costs involved in freight, insurance, customs and countervailing duties. But, with anti-dumping duties imposed on raw materials or intermediates to manufacture fibres, imported prices will still be higher than domestic ones. This would significantly benefit MMF producers because of import parity. In other words, domestic prices are linked to import prices, enabling them to earn a higher profit. Textile mills therefore cannot afford to procure MMFs at these prices and reduce dependence on cotton. Removal of customs duties and a substantial reduction of excise duties on MMFs and their raw materials will strengthen both production and consumption of MMFs. We will also be able to increase our share in global exports of garments and made ups, based on MMFs.
India ranks among the world’s largest producers of MMF and filament yarn with an annual output of 2511 mn kg. MMF and filament yarn comprise many more establishments with an installed capacity of 4013.98 mn kg in 2015. About 80 per cent of the capacity is for polyester filament yarn (PFY). As per data released by the Textile Commissioner’s Office, MMF production in the last three years has gone up marginally, from 1307 mn kg in 2013-14 to 1347 mn kg in 2015-16. Production remained almost stable compared to 2014-15. In the first quarter of 2016-17, MMF production moved up significantly by almost 10 per cent to 340 mn kg from 311 mn kg in April – June 2015. In 2015-16 fiscal man-made filament yarn (MMFY) production was negative and showed no improvement in the first quarter of 2016-17. MMFY production fell from 1294 mn kg in 2013-14 to 1247 mn kg in 2014-15 and further to 1164 mn kg in 2015-16. During April-June 2016, production stood at 279 mn kg compared to 298 mn kg in April-June 2015, a 0.6 per cent decline. Total MMF plus MMFY production declined from 2607 mn kg in 2013-14 to 2590 mn kg in 2014-15 to 2511 mn kg in 2015-16. In the first quarter of 2016-17, production increased by just two per cent to 619 mn kg from 609 mn kg in April-June 2015.
Rising input costs are a major factor affecting exports worldwide with India enjoying the advantage of its own source of raw materials this needs to be leveraged to gain a competitive edge over other countries. Moreover, exports of cotton and cotton yarn need to be regulated in a manner that protects the domestic industry from major fluctuations in raw material prices. There is potential to increase exports by capacity build up in the sector. For this, improving the compliance level in the factories by introduction of common code for the apparel sector is necessary.
There is no difference in technology or skills required for cotton and MMF products. The difference is in cost competitiveness of fibres. Fibre neutral policies promised by the government are yet to be implemented. It would remedy the situation, albeit partly. Increased profit for MMF would retard textile production. The balance between the two should be properly assessed before duties are imposed on MMF, instead of seeking imports that will only destroy domestic production.