NEW DELHI: The Finance Ministry has announced a consistent GST rate of 12 percent for Man Made Fibre (MMF), yarn, textiles and garments, correcting the inverted tax structure in the MMF textile value chain.
MMF, MMF yarn and MMF fabrics are currently taxed at 18 percent, 12 percent, and 5%, respectively. Inputs were taxed at agreater rate than final outputs, resulting in a build-up of credits and cascading cost. It also resulted in the piling of taxes at various points of the MMF value chain, as well as the stifling of the industry’s critical working capital.
The GST Council which is chaired by Union Finance Minister Nirmala Sitharaman and includes state finance ministers, decided on September 17 that inverted tariff irregularities in the textile sector would beremedied beginning January 1, 2022. The Central Board of Indirect Taxes and Customs (CBIC) announced a 12% GST rate on MMF, MMF yarn, and MMF textiles on November 18 to give effect to this decision.
Experts say that while the GST law allows for the claim of an unutilized Input Tax Credit (ITC) as a refund, there are other issues that add to the compliance cost. The inverted tax structure resulted in an effective increase in the sector’s tax rate.
The global textiles trade has been shifting toward MMF, but India has been unable to capitalise on the trend since its MMF segment has been stifled by the inverted tax regime, they claim, adding that the tariff anomaly will be corrected, allowing the segment to flourish and become a major employment source. The rate modifications in the textile industry are the first of the changes announced by the GST Council with the goal of correcting inverted duty structures and bringing an effective tax structure for a certain sector, according to EY Tax Partner Bipin Sapra.