Be prepared to pay 10% more for fabrics

NEW DELHI: Fabrics will become up to 10% more expensive for consumers due to the introduction of value added tax (VAT). The consumer will prefer buying garments to fabrics, as the impact of VAT on the former will be neutral. Fabrics are currently not subject to state sales tax. Under a special dispensation for goods of special importance (GSI), the Central government levies an additional excise duty (AED) of 2% on fabrics, in lieu of a state sales tax. The VAT rate is expected to be higher than this, by about 12%. AED-GSI is levied over and above the basic excise duty of 8%. Fabrics will become up to 10% more expensive for consumers due to the introduction of value added tax (VAT). The consumer will prefer buying garments to fabrics, as the impact of VAT on the former will be neutral. Fabrics are currently not subject to state sales tax. Under a special dispensation for goods of special importance (GSI), the Central government levies an additional excise duty (AED) of 2% on fabrics, in lieu of a state sales tax. The VAT rate is expected to be higher than this, by about 12%. AED-GSI is levied over and above the basic excise duty of 8%. The proceeds from AED-GSI are disbursed by the Centre among state governments. The introduction of VAT will lead to AED-GSI being scrapped. This would require the Central Act for the purpose of differential treatment to GSIs including fabrics, tobacco and sugar, to be annulled. The system was introduced under the controlled cloth scheme, which is believed to have outlived its purpose. India produces 42bn square meters of fabrics per annum, and 80% of this is sold in the domestic market, involving either AED-GSI or the proposed VAT. The need for a proper inter-state clearing arrangement for the reimbursement of VAT would be more relevant to the textile industry, thanks to its complex structure. Industry sources believe a more cohesive mechanism for the inter-state clearance of VAT reimbursement claims should be in place before introducing it to the textile sector. Spinning, weaving and processing are carried out in various hubs across the country. For example, yarn produced in Coimbatore (Tamil Nadu) is woven into fabrics in Bhiwandi (Maharashtra) and processed into garments in Ludhiana (Punjab). This makes the clearance of reimbursement claims difficult because greater inter-state coordination is required.

Be prepared to pay 10% more for fabrics

Fabrics will become up to 10% more expensive for consumers due to the introduction of value added tax (VAT).

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