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India's new tax push hits snags across textile industry

India's recent implementation of its goods and services tax, or GST, has frayed tempers within the country's textile industry. Traders went on strike in July, demanding a rollback of the new tax system amid claims that it is confusing and increases costs.

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Under the GST that was launched at midnight on June 30, the government fixed a 5% levy on cotton fiber, which had been tax-exempt for decades. Synthetic or manmade fiber, yarn and fabric now have tax rates ranging from 5% to 18%. Ready-made garments priced less than 1,000 Indian rupees draw a 5% tax, while those priced more than 1,000 rupees have a 12% tax.

Those in the textile industry protesting the GST argue that they are not digitally or financially empowered to be compliant with the new system, which requires a computer for tax filing.

"About 70% to 80% of textile traders are illiterate," Shri Bhagwan Bansal, vice president of the wholesale cloth traders group Delhi Hindustani Mercantile Association, said in an interview with S&P Global Market Intelligence. "They earn about 15,000 to 20,000 rupees per month. How will they manage to get a computer and an accountant? How will they work with e-bills?"

Bansal said his organization is demanding a GST exemption of at least one year for textile traders, and that the government should provide tax compliance training during that time.

Another major concern is the variation in taxes, according to Bansal, who believes the GST should be imposed only on yarn instead of levied at different rates at every stage of textile production such as weaving, printing and transport, which could help reduce tax paperwork.

The new tax system is also set to put India's massive textile value chain under the full glare of regulatory scrutiny. The textile industry plays a significant role in the country's economy, contributing about 10% to its manufacturing production and hiring more than 45 million people directly, India's Ministry of Textiles said in its 2016-17 report.

The industry is dominated by an informal sector consisting of silk farming, power looms and handicrafts, which frequently involves women working at home with traditional tools. The power-loom segment comprises nearly 2.6 million units nationwide and contributes about 60% of total cloth production in India, according to the ministry report.

This loosely organized sector had previously been able to avoid paying taxes by skipping registration with taxation authorities, dealing in cash and not reporting each transaction to the government. Meanwhile, the formal, organized sector of more than 3,400 textile mills equipped with modern machinery, which includes companies such as Vardhman Textiles Ltd. and Welspun India Ltd., was complying with tax rules in order to keep factories running.

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Under the GST system, taxes input properly can offset those at later stages of production, but the chain of benefits will break if there is an unregistered dealer or someone who hasn't paid taxes.

"In order to get correctly paid input taxes, everyone in the value chain will insist on getting invoices for each transaction, and they will be incentivized to source inputs from other registered dealers," Surbhi Jain, an assistant professor of commerce at the University of Delhi, said in an interview.

The GST regime is expected to widen the pool of registered taxpayers in India and bring additional revenue to the government as the textile industry's informal sector gets drawn into the tax net. But this could leave many players in that sector struggling for survival, particularly if they lack the knowledge and finances to comply with regulations or bear lower profit margins, according to Jain.

In contrast, switching to the GST will be easier for players in the formal sector, as they are generally larger and were already paying taxes. This segment of India's textile industry, which comprises about 30% of the market, is expected to grow as a result, Jain said.

Transportation of textile products across borders is also becoming easier, as the GST subsumed more than a dozen previous federal and state levies. They included octroi, a duty paid by truck drivers at checkpoints on goods entering a city or town.

Although the GST shows the potential to bring long-term advantages to India's textile industry, sewing up all the loose ends of the tax transition might take longer than the two-month period the government originally planned.

Many textile groups, including Bansal's association, have said they will extend their protests if the Indian government does not provide favorable solutions to their demands in upcoming GST Council meetings. The next meeting is scheduled for Aug. 5.

As of Aug. 1, US$1 was equivalent to 64.07 Indian rupees.