Temporarily mitigating what has been an unsettling time in the apparel industry in December, the issue of increasing the goods and services tax in India has been rolled over into the new year.
Textile and retail associations as well as consumers have been mired in discussions these past weeks about a proposed increase in GST tax.
The proposal would raise the rate from 12 percent to 18 percent for the category of goods ranging in price from 1,500 rupees ($17.55) to 10,000 rupees ($117). Apparel priced at more than 10,000 rupees would see an increase from 12 percent to 28 percent, while the highest price category’s tax rate would jump from 28 percent to 35 percent. Apparel priced below 1,500 rupees would maintain a rate of 5 percent.
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Discussions began heating up from the first week of December through the 55th meeting of the GST council on Dec. 21, chaired by finance minister Nirmala Sitharaman.
“It did not come up at the meeting, which is a welcome relief for the industry, but it has not been dropped, just deferred. So the fear of the same issue at subsequent meetings is there,” Sanjay K. Jain, managing director of TT Ltd. told Sourcing Journal.
“The industry is making strong representations to the government, advising that these increments should not be made in the different slabs.” He explained that it was unusual for an industry to have multiple slabs, or tax brackets, and opined that the apparel industry should not be singled out for such treatment.
“In India, even a poor man buys apparel and saris that cost more than 1,500 rupees ($17.55) for marriages and festivities. Even though it looks like a luxury, it isn’t really so; in the past years inflation and purchasing power parity has changed, so the same goods now come at a higher price. Higher taxes on this will hurt both the consumers and the manufacturers. Increasing the taxes on the other categories will lead to more complexities,” he said.
“A lot of the industry huddled together when this issue was raised a few weeks ago,” said Chandrima Chatterjee, secretary general of Confederation of Indian Textile Industry (CITI).
“We are very happy that it has not been taken up—at least in this round. We want wider stakeholder consultations and discussion about the impact of such an additional tax. It can have many dimensions—we will have to look closely at the elasticity of this demand. Also increasing the above-10,000-rupee category to a 28 percent tax is a very large jump, and instead of seeing this as luxury purchase, it should be linked to entrepreneurship and rather for ways to foster and grow these entrepreneurs. Many of the sales in this category are for the bridal segment, and are small boutiques.”
A government official explained, on the condition of anonymity, that the government aim was both to increase tax revenue and tackle the issue of tax evasion in certain price segments.
Arguments from the industry have been strident, emphasizing that this would likely work the opposite way, and defeat the very goal that the government was aspiring towards. More companies could be pushed into the informal sector to avoid the high taxes, they argue.
Even as the year comes to a close with strong sales (India’s apparel market is expected to reach $105.5 billion in revenue and reach $387.3 billion by 2028), associations and garment manufacturers have been teaming with retailers to bring these points to government notice. The issue of job losses if these increases do come into effect are a critical concern. The textile industry is the second highest employer in the country after agriculture.
The Clothing Manufacturers Association of India (CMAI) has warned that the effects would reverberate through the economy, including closure of small and medium enterprises (SMEs), and a disruption of the entire textile value chain.
“The proposed GST rate hike risks severely disrupting the formal retail sector by driving both consumers and businesses toward informal channels. This shift would adversely affect legitimate retailers and potentially benefit unscrupulous sellers and illegal merchants,” a spokesperson for CMAI observed, adding that this move could impact up to 100,000 jobs.
The small and medium-sized enterprises in spinning, weaving, and garment manufacturing operate on thin profit margins, facing income losses and squeezed profitability. He said that the proposed change in GST slabs would result in a reduction of compliance, as well as the focus on bringing more of the industry into the formal sector, and it could potentially work the opposite way, by eroding the tax base.
“A more effective strategy might involve encouraging compliance through lower tax rates and better enforcement,” he said.
Rahul Mehta, chief mentor of the CMAI said, “The government must consult industry stakeholders to fully understand the implications and avoid further challenges before making decisions. The government’s commitment to ease of doing business should reflect in their actions, supporting policies that drive growth, reduce obstacles, and help the industry to thrive.”
