What are the GST provisions for the textile industry?

The textile industry is one of India’s largest sectors, contributing significantly to GDP and employment. With the introduction of the Goods and Services Tax (GST), the industry has witnessed structural changes in tax compliance and cascading tax elimination.

Constitutional Framework for GST on Textiles

1. Article 246A

• Grants the Union and State legislatures concurrent power to legislate on GST, ensuring that all textile-related transactions are subject to a uniform taxation system.

2. Article 265

• Ensures no tax is levied or collected except by the authority of law, mandating compliance with GST provisions for the textile sector.

3. Article 366(12A)

• Defines GST as a tax on the supply of goods and services, covering textiles and related transactions.

4. Article 286

• Prohibits states from taxing inter-state supplies, ensuring that the Integrated GST (IGST) framework applies seamlessly to the textile trade across states.

Provisions Under GST for the Textile Industry

1. GST Rates for Textiles

• GST rates for textiles vary depending on the type of product and stage of production:
  • Natural fibers (e.g., cotton, silk, jute): 5%.
  • Man-made fibers and yarn: 12%.
  • Fabrics: 5%.
  • Garments:
    • Up to ₹1,000 per piece: 5%.
    • Above ₹1,000 per piece: 12%.
  • Textile job work (e.g., dyeing, printing): 5%.

2. Input Tax Credit (ITC)

• Manufacturers, job workers, and traders can claim ITC on inputs used for textile production, reducing tax cascading.
• ITC is not available for exempt supplies like unprocessed cotton supplied by agriculturists.

3. Reverse Charge Mechanism (RCM)

• GST under RCM applies to purchases from unregistered suppliers in specific cases, such as raw cotton directly from farmers.

4. Export Benefits

• Exports of textiles are zero-rated under GST, meaning exporters can claim a refund of input taxes paid.

5. GST Composition Scheme

• Small textile businesses with a turnover of up to ₹1.5 crore can opt for the composition scheme, paying a fixed GST rate without claiming ITC.

6. GST Registration Requirements

• Mandatory registration for textile entities engaging in inter-state trade, even if turnover is below the threshold limit.

7. Job Work Provisions

• Textile job work services are taxed at 5%, encouraging small-scale and outsourced production units.

Impact of GST on the Textile Industry

1. Benefits

1. Elimination of Cascading Taxes:
   • GST replaced multiple taxes, including VAT, excise duty, and service tax, creating a unified system.
2. Encouragement for Exports:
   • Zero-rating of exports and refund of input taxes enhance competitiveness in global markets.
3. Ease of Compliance:
   • A single tax framework simplifies compliance, especially for larger players.
4. Reduction in Tax Evasion:
   • GST ensures better tracking of transactions through ITC claims and electronic invoicing.

2. Challenges

1. Complex Compliance for SMEs:
   • Small businesses face challenges in adapting to GST’s documentation and filing requirements.
2. Higher Costs for Man-Made Fibers:
   • GST rates for man-made fibers are higher than for natural fibers, creating an inverted duty structure.
3. Delayed Refunds:
   • Exporters often face delays in claiming refunds, impacting liquidity.

Constitutional Provisions Addressing Sector-Specific Challenges

1. Equal Treatment Across States (Article 286):

• Ensures uniform taxation across states, addressing the fragmented tax structure faced by textile manufacturers and traders before GST.

2. State-Specific Exemptions and GST Council:

• The GST Council, established under Article 279A, recommends changes in rates and exemptions to address sectoral challenges.

Landmark Cases in GST and Textiles

1. Arvind Limited v. Union of India (2020)

• Issue: Refund of input tax credit for textile exporters.
• Judgment: Gujarat High Court ruled in favor of exporters, directing the GST department to process ITC refunds promptly, ensuring liquidity.

2. M/s Indo Rama Synthetics (I) Ltd. v. Commissioner of GST (2021)

• Issue: Inverted duty structure affecting man-made fibers.
• Judgment: Tribunal highlighted the need for policy revision to address ITC accumulation due to higher GST on inputs than outputs.

3. M/s. Saree Impex v. Union of India (2019)

• Issue: Applicability of GST on job work services in textiles.
• Judgment: Karnataka High Court clarified that GST applies at 5% to textile job work services, reinforcing uniformity in taxation.

4. Kumar Cotton Mills Pvt. Ltd. v. State of Gujarat (2022)

• Issue: Applicability of reverse charge mechanism on cotton purchases.
• Judgment: Gujarat High Court upheld the RCM provisions, emphasizing their validity under the GST Act.

5. Bangalore Hosiery v. GST Council (2020)

• Issue: Delay in refund processing for small textile exporters.
• Judgment: The court ordered the GST department to streamline refund mechanisms for timely disbursement.

Conclusion

The GST framework for the textile industry, governed by the CGST Act, 2017 and related provisions, has streamlined taxation and enhanced compliance. Constitutional safeguards like Article 246A and Article 286 ensure uniform application, while judicial interpretations in landmark cases provide clarity on ambiguous issues. Despite challenges like inverted duty structures and compliance hurdles for small businesses, GST has made the textile sector more transparent, competitive, and integrated.