India: Embedded Tax and the Apparel Sector

November 7, 2017


Introduction –

The textile and apparel sectors can be referred to as one of the backbones of the Indian economy. It is the single largest instrument based on consumer needs, right after food. The sector is the second largest employer after agriculture with direct employment of over 5 crore and indirect employment of over 6 crore people. Its share of GDP and exports are 6% and 13% respectively. The apparel sector in particular is the most labour intensive sector in the manufacturing industry. When it comes to comparison with two other sectors of proportionate size, it is 80-fold more labour intensive than the automotive industry and 240-fold more intensive than the steel sector.

Present State of Embedded Tax in India –

In the wake of the new GST scheme, the exporters of garments in India are facing uncertainty and dilemma as the government decided to slash duty drawback to 2 percent from 7.5 percent with effect from October 1, 2017. This new step taken by the Government has brought nation-wide unrest and commotion among the exporters. The new rate is considered a direct slap to the already struggling Micro, Small and Medium Enterprises (MSMEs) because of the high duties imposed by foreign countries and the competition it is facing from neighbouring countries like Bangladesh and Sri Lanka. With just 2% as the drawback rate, it would be a Herculian task for the MSMEs to compete and export.

In its effort to tackle this latest challenge faced by the textile and garments industry, the Apparel Export Promotion Council (AEPC), before the commencement of the GST Council’s meeting on October 6, 2017, has urged the Indian government to address the refund of embedded taxes on exports of textiles and garments. These taxes also include the levies on cotton, electricity, and input tax credit restrictions for man-made fibres used in textiles and purchases made from unregistered dealers.

It is the contention of the industry as a whole that the drawback rates at which the Government is planning to operate is not in the best interest of the industry nor the economy. It is expected that such meager drawbacks will definitely lead to a sharp decline in the rate of exports from the nation as a whole. Further, bear in mind that Indian exporters pay 10% duty to have access to the European markets.[1] The rupee overvaluation is yet another factor, which has been haunting the export business and above all this; a new low duty drawback rate means disaster for majority of the MSME units in the apparel exports.

Conclusion –

The only reasonable approach at this point would be to keep up with the previous drawback rate in order to help the smaller industries prevail in the international market. But if there is no turning back, it would be favorable if the Government at the least hold the previous rate until the end of the current Financial Year. This would to an extent provide certain amount of time (even if it is not sufficient) for the industry to prepare itself for the new rate.


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