Mrs. Vinita Ahire-Kale
MIT WPU School of Management (PG) – Pune.
Contact no – +91 87 96 075753
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Ms. Shreya Mukesh Kanodia
MIT WPU School of Management (PG)– Pune.
Contact no – +91 73 87 080424
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Abstract – Garment sector of India is one of the oldest and largest contributors toward the development of the Indian economy, concerning GDP, employment, export promotion, etc. Known as one of the oldest manufacturing industry in the country and the second largest after agriculture, the garment industry employs both skilled and unskilled people. Pre-GST era with the support from the global economy this sector was doing well in India. With the arrival of GST, which is no doubt a daring step by the Government to strengthen the economy, this sector has suffered a jolt. After implementation of the Goods and Services Tax the scenario has changed in the Garment sector. In past two years after implementation of GST, 2017-18 and 2018-19 there were various changes which took place in growth of garment industry. The changes in rate of taxes and its slab rates under GST which also affected end customers. It also included effects caused by unorganized and organized sector under garment industry.
The study is done on the basis of primary as well as secondary sources of data collection. Secondary sources are Government generated reports which give overall study of the country and GST Act which is foundation of this study. Literature Reviews are been considered for designing the research methodology. Hypothesis is framed with respect to only suppliers of Garment sector like manufacturers, wholesalers and retailers. Analysis and interpretation will be done through some cases which will be related to GST in Garment sector though selective sampling.
Keywords: Goods & Service Tax, Garment Sector, economy, slab rates, organized sector, unorganized sector.
TABLE OF CONTENTS
TABLE OF CONTENTS
|6||Findings and Conclusion||14|
|7||References and Abbreviations||15|
The Goods and Service Tax (‘GST’), considered India’s biggest and most historic tax reform is just around the corner. To err is to perceive GST as just any other “Tax Reform”. GST signifies “Change” that too a Game changer!! With the Government leaving no stone unturned to usher in GST on 01 July 2017, GST roll-out is going to change market dynamics by creating an integrated marketplace. This new taxation regime not only requires organizations to capture appropriate data for computation and compliance, but also presents a unique opportunity for cost optimization and cash liberation. The hitherto shadow economy in business would be forced to join the mainstream and time of fake bills could end. Unless tax is paid no one can avail credit and claim refund on exports.
Taxation of garment sector is opaque and non-neutral across its various segments. Many textile outputs are either exempt under the central and state tax regimes or are subjected to relatively low tax rates. Most of the indirect taxes fall on inputs, both goods and services, and therefore remain hidden. On the whole, the garment sector is lightly taxed and extensively subsidized. Garment exports are supported through payments of un-rebated taxes (duty drawback) on textile inputs and other subsidies.
Indian apparel industry has a great potential and is a major foreign exchange earner. Indian apparels are high in fashion and hence are in great demand abroad. There are around 30,000 manufacturing units in the country, but these are small and fragmented. They employ around 3 million people and earn Rs. 18,000 crores by exports.
Article 366(12A) defines “Goods and services tax” as any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption. “Goods and Services tax” law (GST Law) has unique principles, significant elements of prior Central and State laws and is also inspired by VAT/GST legislation of European Union (EU), Australia, Malaysia etc. along with International VAT/GST guidelines of Organisation for Economic Co-operation and Development (OECD).
Indian readymade garments/apparels (RMG) industry is the largest segment of the Indian T&A Industry accounting for approximately 50% of the total industry. The domestic RMG sector accounts for approximately three-fourths of the total Indian RMG industry. Given that RMG manufacturing units can be viable at all size levels, particularly because of low cost of plant and machinery, the units range from small to large. Consequently, the RMG sector continues to be dominated by unorganized players. However, the branded apparel market has made steady inroads in the past few years.
- Shebazbano Khan has expressed her views in her research paper titled ‘An Impact of GST on Textile hub of Mumbai (Bhiwandi, Dist. Thane) that GST has negatively impacted the overall cotton value chain by removal of its benefits on Textile Industry. Due to more registered tax payers under GST, many textile industries has shifted towards organised sector. It also has positively impacted in terms of both Global and National Competition. GST would also enable an effective input tax credit system for everyone.
- Tanushree Gupta has observed through her research ‘An Impact of Goods and Service Tax (GST) on Indian Textile Industry’ that there are various reasons for changes in tax rates specified to textile inputs and outputs such as excise duty on fabrics increased from 5% to 6%, abatement applicable to branded readymade garments increased from 55% to 70% of the Retail Sale Price. In this research, there is difference stated with regards to indirect taxes applications before GST implementation. There are also possible suggestions related to raw material bank, supply of handloom parts at subsidized rates, improved dyeing facility and product and design development.
- Meenu Srivastava has expressed her views in her research paper ‘GST effect on Textile and Apparel Industry of India – An Overview’ that GST on readymade garment will create a significant difference in consumption as tax slab under GST is 5% and 12% whereas under VAT it was just 4%-5% and 2% excise duty. This will affect the prices of aparels indirectly to end consumers as they have to bare all taxes. GST has resulted into transparency of tax system. GST has also helped in increasing exports and using modernised technology in textile industries. Cascading effect of indirect taxes has been abolished due to GST.
- S.Sreshma , M.Aswamalika and V.Aparna has conducted ‘A study on the impact of GST on Branded Textile Products’ which contained various factors that leads to brand preference of the product by consumer. It also studied factors which affected relationship between price and quality of the product after GST. This research was done by primary data collection from sample size of 50 consumers using questionnaire method. There is also change in offers and discounts after GST has implemented on Branded products as per consumers. This study states that after implementation of GST, there are changes created by customer’s mind regarding their buying behaviour.
The study signifies the effects of GST on Garment Industry for which contains various problem statements which are as follows:-
- Rates of Garment products has increased after implementation of GST
- Exports have decreased after imposing of GST on suppliers
- Even after implementation of GST, cash sales transactions have not been vanished from Garment Industry
- GST Registration been on voluntary basis has made certain disadvantages to small businesses
- Input Tax credit has increased the burden of tax to end customers
OBJECTIVES OF THE PROJECT
- To study GST transactions related to Garment Industry
- To know exports effects after implementation of GST
- To study input tax credit advantages taken by Suppliers
- To know increase in cash sales transactions done by composite suppliers
- To study various tax slabs of Garment Industry under GST Act
SCOPE OF RESEARCH
- The project is related to GST effects on Garment Industry which is positive as well as negative effects.
- There are various transactions in Garment industry by which the suppliers take advantage from Tax and which has certain disadvantages in Government’s revenue.
- This project also tells about the exports under Garment Industry after implementation of GST.
- This study is reliable to Garment Industry only which consists of manufacturers, wholesalers and retailers, it does not include textile industry.
- The analysis and interpretation is done on the basis of various cases which takes place in Garment industry and various authorized reports which gives relevant information.
- The cases which are involved for analysis are collected from day to day transactions in Garment Industry
|Sample Size||5 cases|
|Sample Method||Selective Sampling|
|Data Collection Method||Primary as well as secondary source of data|
|Primary source of Data Collection||Interview, Tax invoices|
|Secondary source of Data Collection||Government reports, GST Act, newspapers, reference books|
- Null Hypothesis: H0: There are significant effect of GST on garment industry due to discounts given to end consumers
Alternative Hypothesis: H1: There is no significant effect of GST on garment industry due to discounts given to end consumers
- Null Hypothesis: H0: There is significant decrease in exports in Garment Industry due to GST.
Alternative Hypothesis: H1: There is significant decrease in exports in Garment Industry not due to GST.
- Null Hypothesis: H0: There are significant benefits which have increase for suppliers due to implication of Input Tax Credits.
Alternative Hypothesis: H1: There are significant disadvantages which have increase for suppliers due to implication of Input Tax Credits.
DATA ANALYSIS AND INTERPRETATION
EFFECTS OF GST ON GARMENT INDUSTRY DUE TO DISCOUNTS GIVEN TO END CONSUMERS
As per GST Act, Tax rate under Garment Industry are as follows:-
|HSN||Description of Goods||Unit||GST Rates|
|61,62 & 63||Articles of apparel and clothing accessories falling under chapter 61, 62 and 63, of sale value not exceeding Rs. 1000/- per piece.||u||2.5%||2.5%||5%|
|61,62 & 63||Articles of apparel and clothing accessories falling under chapter 61, 62 and 63, of sale value exceeding Rs. 1000/- per piece.||u||6%||6%||12%|
There is benefit taken by suppliers on sale of garments through end consumer on following way:-
|Price of Garment (Exclusive of GST)||12%||1350|
|(-) Discount(before GST)||(500)|
|Price of Garment (Exclusive of GST)||5%||850|
In the above case, when price of the Garment of Rs 1350 then GST rate applicable is 12% but if the price reduces to Rs 850 due to discount of rs 500 then GST rate reduces to 5%. Here the customer is in the misconception that he is paying less tax and getting benefit but when supplier charges less GST on output of goods then the suppliers gets the benefit through input tax credit.
INTERPRETATION OF THE ABOVE CASE
Thus from the above case related to discounting transactions on sales to end consumer, null hypothesis has been proved that “There are significant effect of GST on garment industry due to discounts given to end consumers.” This effect has positive effect from the point of view of end consumer and supplier but has negative effect from the point of view of Government’s revenue.
DECREASE IN EXPORTS IN GARMENT INDUSTRY DUE TO GST
As per CARE Ratings on Exports of Garments, they have framed the total exports for Financial Year 2018-19 which are compared with last few years.
The above graph tells about the total exports from financial year 2010 till financial year 2018. There is a drastic change in the growth of exports in garment industry of India. There are various reasons due to which there has been such change in the exports since last 3 years.
India’s garment exports grew at Compound Annual Growth Rate (CAGR) of 5.7% from $10.7bn in FY10 to $16.7 bn in FY18. There is growth in exports which can be attributed due shifting of the garment manufacturing base from the developed countries like the US and the EU to the developing countries having low cost such as China, Vietnam, India, Bangladesh and others. In 2004, Multi Fibre Agreement phase-out also helped India to increase its exports. After witnessing a marginal growth of 2.4% in FY17, Resource Management Group (RMG) exports reported a negative growth rate of 3.8% during FY18 due to decrease in competitiveness of Indian players after implementation of GST. In FY18, India’s garment exports also reduced primarily due to competition from countries like Bangladesh, Sri Lanka etc. which have low production cost and enjoy preferential duty access in key markets.
The US and EU together constitute for approximately, 60% of the total apparel exports from India in value terms. Out of these, the US is the single largest importer, while the European Union is the largest regional importer. The US disengagement from several multinational partnerships coupled with the Indian government’s measures to boost exports will help Indian exporters gain market share in the US in the long run. On the other hand, India is projected to lose market share to Bangladesh and Vietnam for RMG exports to the EU, because of lower competitiveness as Bangladesh has duty free access to the EU and Vietnam Is expected to gain such access in a longer period. However, apparel manufacturers are now focusing on diversifying their markets; thereby the apparel exports to countries such as Japan, Israel, South Africa and Hong Kong are growing at a very fast rate.
INTERPRETATION OF THE ABOVE CASE
Thus from the above case related to decrease in exports in Garment Industry, alternative hypothesis has been proved that “There is significant decrease in exports in Garment Industry not only due to GST implementation.” This is because under Goods and Services Tax (GST) law there are input tax credit claims advantage taken by exporters as they have only purchases under GST and as sales is in another countries as exports, no GST is levied. Custom duty plays role in export of goods and services from India. Garment products are tax free goods under Customs Duty Act. So the suppliers of exports get refund from Government through GST. But the cost has increased and Indian Garment Market has competition from Bangladesh, Sri Lanka etc. which exports in cheaper rate. This is also because of depressed economic conditions which has less demand and high supply. Hence its concluded that decrease in exports is not only due to GST.
BENEFITS WHICH HAVE INCREASE FOR SUPPLIERS DUE TO IMPLICATION OF INPUT TAX CREDITS
In case of local supply of garment product, the supplier would charge dual GST i.e., CGST and SGST at specified rates on the supply.
I. Supply of garment product by Manufacturer A to Retailer B
|Price charges for supply||10,000|
|Add: CGST @ 6%||600|
|Add: SGST @ 6%||600|
|Total price charged by Manufacturer A||11,200|
The CGST &SGST charged on retailer B for supply of garment product will be remitted by Manufacturer A to the appropriate account of the Central and State Government respectively.
Manufacturer A is the first stage supplier of garment product and hence, does not have credit of CGST, SGST or IGST.II. Supply of Garment Products by Retailer B to End Consumer C–Valueaddition@20%
Retailer B will avail credit of CGST and SGST paid by him on the purchase of Garment product and will utilize such credit for being set off against the CGST and SGST payable on the supply made by him to End Consumer C.
|Price charged (` 10,000 x 120%) for supply||12,000|
|Add: CGST @ 6%||720|
|Add: SGST @ 6%||720|
|Total price charged by Retailer B||13,440|
Computation of CGST, SGST payable by Retailer B to Government
|Less: Credit of CGST||600|
|CGST payable to Central Government||120|
|Less: Credit of SGST||600|
|SGST payable to State Government||120|
In case of inter-State supply of Garment products, the manufacturer would charge IGST.
I. Supply of Garment Products by Manufacturer of State1 to Wholesaler A of State1
|Price Charged for supply||10,000|
|Add: CGST @ 6%||600|
|Add : SGST @ 6%||600|
|Total Price charged by Manufacturer||11,200|
Manufacturer is the first stage supplier of Garment Products and hence, does not have any credit of CGST, SGST or IGST.
II. Supply of Garment Product by Wholesaler A of State 1 to Retailer B of State 2
|Price charge(` 10,000 x 120%) for supply||12,000|
|Add: IGST @ 12%||1,440|
|Total price charged by Wholesaler A||13,440|
Computation of IGST payable to Government
|Less : Credit of CGST||600|
|Less : Credit of SGST||600|
|Net IGST Payable||240|
The IGST charged on Retailer B of State 2 for supply of Garment product will be remitted by Wholesaler A of State 1 to the appropriate account of the Central Government. State 1 (Exporting State) will transfer SGST credit of Rs 600utilizedin the payment of IGST to the Central Government.
III. Supply of Garment Product by Retailer B of State 2 to End Consumer C of State 2 – Value addition @20%
Retailer B will avail credit of IGST paid by him on the purchase of Garment product and will utilize such credit for being set off against the CGST and SGST payable on the local supply of garment product made by him to End Consumer C.
|Price charged (12,000 x120%)||14,400|
|Add: CGST @ 6%||864|
|Add: SGST @ 6%||864|
|Total price charged by Retailer C||15,350|
Computation of CGST, SGST payable to Government
|Less : Credit of IGST||864|
|Net CGST Payable||NIL|
|Less : Credit of IGST (1440-864)||576|
|Net SGST Payable||288|
INTERPRETATION OF ABOVE CASE
Thus from the above case related to input tax credit which is availed by suppliers, it can be concluded that null hypothesis has been proved. There are certain benefits which are taken by suppliers due to implication of input tax credit. Even this has decreased the cascading effect of tax and gives revenue to Government as per one Nation one Tax.
The effect to input tax credit gives suppliers to give more productivity in terms of earnings in revenue as tax is simple to calculate and tax payment are saved due to transfer of tax from one supplier to another supplier. In Garment Industry, as there are existence of manufacturers, wholesalers and retailers as supply chain then the credit benefit is levied more by these suppliers but the manufacturers cannot take more benefit as compare to wholesalers and retailers as they are first suppliers in the supply chain and they don’t have any input of goods/services, but these applies only to those manufacturers who does not have any raw material purchases.
After the analysis and interpretation of cases following are findings:-
- GST is an initiative which was done to have transparency and accountability in terms of supply of goods and services.
- Rates of GST play an important role with respect to buying behavior of the customer and also perception of end customers.
- Garment sector being one of the largest sector in India is to be considered as important element in contribution for increasing Government revenue through indirect taxes also.
- For exports, GST is not only reason to decrease but also other factors are significant to increase the exports.
- Input tax credit mechanism has helped various organized as well as unorganized sectors from different states to be part of GST and this is different from earlier indirect tax system.
- GST helps to connect tax invoice from manufacturer till the end consumer and check the authenticity of it in each stage of supply.
India is on the changing path and GST is one of the important steps taken towards development of the country. Garment sector not only contributes for the development of the country but also helps to improve economic conditions of the nation.GST was implemented on 1st July’2017 and after two years there is drastic change in organized as well as unorganized sector which can be observed in this study related to the garment sector. During this study, it was observed that in Garment sector, there are various reforms which took place due to GST implementation like GST rates have increased as compare to earlier tax rates, input tax credit systems in intra state and interstate supply are different, the benefits taken by supplier through input tax credit has given positive affect as it reduces cascading effect of taxes. GST is going to help country to develop and also helps positively to increase revenue to Government as well as suppliers. As per the above cases, its analysis and interpretation it can be concluded that in garment sector there are benefits to all participants in supply chain except the manufacturers as they are the first stage suppliers as per GST Act and they cannot claim through any purchases made by them. Thus GST has both positive as well as negative effects in Garment sector in many ways to everyone.
- Shebazbano Khan, An Impact of GST on Textile hub of Mumbai (Bhiwandi, Dist. Thane)
- Tanushree Gupta , An Impact of Goods and Service Tax (GST) on Indian Textile Industry
- Meenu Srivastava , GST effect on Textile and Apparel Industry of India – An Overview
- S.Sreshma , M.Aswamalika and V.Aparna , A study on the impact of GST on Branded Textile Products
- Website – https://www.gst.gov.in/
- Website – http://www.cbic.gov.in/htdocs-cbec/gst/index
- Textiles and Apparel Report, March 2018, India Brand Equity Foundation
- Indian Apparel Industry Overview, Industry Research, April 2019, CARE Ratings
- Annual Report 2017-18, Ministry of Textiles, Government of India
- Clothing and Textile Exports Report, Ministry of Textiles, Government of India
- CAGR – Compound Annual Growth Rate
- CGST – Central Goods and Services Tax
- EU – European Union
- FY – Financial Year
- GDP – Gross Domestic Product
- GST – Goods and Services Tax
- IGST – Integrated Goods and Services Tax
- RMG – Resource Management Group
- SGST – State Goods and Services Tax
- US – United States
- VAT – Value Added Tax