The finance ministry announced a consistent 12% GST rate on manmade fibre (MMF), yarn, textiles, and garments, resolving the inverted tax structure in the MMF textile value chain.
The tax rates for MMF, MMF yarn, and MMF textiles are 18%, 12%, and 5%, respectively.
Input taxes at greater rates than finished product taxation resulted in credit accumulation and cascading costs. It also resulted in the build-up of levies at various points of the MMF value chain and the stifling of critical working capital for the sector.
The GST Council, led by Union Finance Minister Nirmala Sitharaman and comprised of state finance ministers, determined on September 17 that the inverted tariff anomalies in the textile industry will be remedied from January 1, 2022.
To give effect to this judgment, the Central Board of Indirect Taxes and Customs (CBIC) announced a 12% GST rate on MMF, MMF yarn, and MMF textiles on November 18.
Although there is a mechanism in GST legislation for claiming the unutilized Input Tax Credit (ITC) as a refund, experts say additional issues resulted in a higher compliance cost. The inverted tax structure resulted in an effective rise in the sector tax rate.
The global textile trade has been shifting toward MMF. Still, India has been unable to capitalize on the trend since the inverted tax system has stifled its MMF industry, they claim, adding that the adjustment in the anomaly will assist the segment flourish and emerge as a major employment source.
According to EY Tax Partner Bipin Sapra, the textile industry rate modifications are the first revisions announced by the GST Council to correct inverted duty structures and bring an effective tax structure to a specific sector.