Economy

Inverted Duty Correction Might Increase the Cost of Clothes and Footwear

The Goods and Services Tax (GST) Act allows registered businesses to claim the Input Tax Credit (ITC) paid on inputs, input services or capital goods while paying output tax on final products or services. This ITC claim process prevents the cascading of taxes and helps in lowering the tax burden.

Sources say that the 12% GST rate is under consideration for the textile and footwear segment to correct the inverted duty structure and allow manufacturers to claim the full ITC. However, the impact of raised tax on the end price will only be marginal as manufacturers are expected to pass on the ITC benefit to consumers.

Current GST rates on apparel and footwear

Following are the present rates charged on final products in apparel and footwear:

Sector Valued up to Rs.1,000 Valued more than Rs.1000
Apparels GST@5% GST@12%
Footwear GST@5% GST@18%

The textiles sector is currently suffering severely due to the inverted duty structure as the value chain ranges from 5% to 18% as below:

Apparel raw material GST rate
Cotton, natural fibre and yarn 5%
Man-made yarn 12%
Man-made fibre 18%

Similarly, in the footwear sector, GST rates on raw materials are as follows:

Footwear raw material GST rate
Leather 5%
Technical textiles (used in the manufacturing of footwear) 12%
Soles, components, chemicals, consumables, services, and capital goods 18%

However, 70% of the inputs have GST of more than 5%is paid, a 5% tax on end product costing up to ₹1,000 creates inversion.

Proposed GST rates from January 2022

Sources say there is a chance that the GST Council may allow charging a uniform GST rate of 12% on apparel. However, two GST slabs might be made for footwear, such as 12% for footwear valued at Rs.1,000 and 18% for items valuing more than Rs.1,000.

Impact

The taxpayers can claim the refund of unutilised ITC  in case of an inverted duty structure. However, it leads to working capital issues and increases scrutiny work for the department. The proposed changes are in the right direction of reducing working capital blockage and improve their cash flows. 

Hence, these can be considered as a sign of relief for the two sectors. Further, it might slightly increase the price of footwear and apparel and impact many consumers. However, consumers could benefit from this move if the manufacturers benefit from improved cash flows by reducing the product prices.

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For any clarifications/feedback on the topic, please contact the writer at dvsr.anjaneyulu@cleartax.in

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