Indian Textile Sector: GST Impact Analysis August 2016 ndia remains GST ties up cotton-based textile value chain in knots; industry awaits final GST rates to determine impact ICRA RESEARCH SERVICES GST CORPORATE RATINGS Anil Gupta +91 124 4545 314 anilg@icraindia.com Deep Inder Singh +91 124 4545 830 deep.singh@icraindia.com Rohit Inamdar +91 124 4545 847 rohit.inamdar@icraindia.com ICRA Limited P a g e 1
Indian Textile Sector: Impact Analysis of GST Indirect tax incidence in textile sector is currently low due to availability of optional route of payment of excise duty For ~480 companies rated by ICRA in spinning and weaving sectors with turnover of ~57000 crore, the excise duty incidence is lower than 1% as the textile chain is largely cotton-based Given the optional route, effective excise duty taxation rate for textile industry is low The domestic textile industry has an optional route to pay zero excise duty across various stages of the value chain, provided they don t claim the Input Tax Credit (ITC) at any stage. Most of the players in the value chain operate through the optional route, thereby resulting in lower duty incidence. Some of the key reasons are: 1) Domestic spinning industry is largely cotton-based which is not subject to excise, and hence the extent of ITC will be minimal 2) Fragmented nature of weaving industry with a large presence of the SSI sector operating under the composite scheme for taxation, hence units in the downstream sectors, like those involved in processing, garmenting etc cannot claim ITC 3) With no ITC, the apparels/home textiles have not been attracting excise duty till FY2016; in the Union Budget of 2016, a concessional excise duty of 2% (with abatement of 40%), i.e. effective rate of 1.2% was applied for branded garments with MRP of >Rs 1000 4) However, the man-made fibre sector to some extent operates on a regular duty structure while claiming ITC, as the fibre (polyester, nylon, viscose etc) attracts duty at the manufacturing stage, unlike cotton Accordingly, as can be seen from Exhibit 1, the ~290 spinning companies rated by ICRA (Revenue of ~48000 crore in FY2015) attracted an excise duty incidence of less than 1%, which reflects the optional route chosen by the spinners. The duty incidence is largely on account of the players operating with manmade fibre, whereas cotton spinners operate at nil duty. Similarly in Exhibit 2, the effective excise duty paid by ~190 weaving units rated by ICRA (Revenues of ~ Rs 8800 crore in FY2015) attracted the excise duty incidence of less than 1% with cotton-based players operating at nil duty structure. Exhibit 1: Trend Effective excise duty paid by spinning industry 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 4.12% Sources: Average of ~290 spinning units rated by ICRA - accounting for revenues of ~Rs 48000 crore 10.30% 5.15% 0.8% 0.7% 0.7% 0.9% 0.6% FY11 FY12 FY13 FY14 FY15 With Cenvat Credit - Cotton Effective Excise paid With Cenvat Credit - Others Exhibit 2: Effective excise duty paid by fabric weaving industry 12.00% 10.00% 10.30% 8.00% 6.00% 4.00% 5.15% 2.00% 0.56% 0.66% 0.66% 0.45% 0.53% 0.00% FY11 FY12 FY13 FY14 FY15 With cenvat credit - Cotton With Cenvat credit - Others Effective Excise paid Average of ~190 units rated by ICRA accounting for revenues of ~Rs 8800 crore ICRA Limited P a g e 2
Indian Textile Sector: Impact Analysis of GST The proposed GST rate of 12% to have negative impact on the textile sector due to current incidence of low rates Cotton-based value chain to be adversely affected, in comparison to the man-made textile sector GST on cotton textile chain can lead to gradual shift towards man-made fiber which was already subjected to indirect taxes Lack of input credit to disincentivise the suppliers to remain outside GST, else the prices of their goods can become uncompetitive Impact: Negative because of current incidence of low tax rate; especially, on cotton value chain; exports however, will not be impacted as it will be zero-rated While the final GST rates are yet to be announced, even at the 12% lower rate recommended by the Dr. Arvind Subramanian Committee, the textile sector is likely to be negatively impacted. The cotton value chain is likely to be the worst affected as it is currently attracting zero central excise duty. Currently, the State VAT is ~4~5% on apparels and with ~1.2% effective central excise duty on branded garments with MRP of more than Rs 1000, the overall tax incidence on the finished goods, i.e. apparels is much lower than 12%, which is the lowest rate being proposed in GST At 12% rate, the apparel retailers will not have sufficient input credits (such as service tax on rent of showrooms) to offset the increased tax liability if the GST is not levied on upstream sectors like yarn and fabrics and will be negative for retailers Within the spinning industry, the cotton-based players will be adversely impacted as GST levy will require an increase in cotton yarn prices as the ITC will not be sufficient to offset the increased tax liability under GST. The manmade spinning sector, which uses fibres which are currently being taxed, is unlikely to have an adverse impact due to GST Fabric manufacturing in India is largely carried out through the SSI sector, where many of the companies operate under the composite scheme of taxation (applicable with turnover of up to Rs 1.5 crore). ITC cannot be claimed on purchases from suppliers under composite scheme. With GST on yarn, the apparel manufactures would prefer to deal with GST-compliant fabric suppliers to avail ITC (see Exhibit 3). Accordingly, ICRA also expects that due to reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry towards manmade fibre. It may be noted that India currently operates with a fibre mix of cotton: manmade of 60:40; as against global average of cotton: manmade of 40:60. However, the above impact will be dependent on the final rates which will be applicable to the sector. Incentive to deal with GST-compliant suppliers: Exhibit 3 depicts how GST non-compliant suppliers will become uncompetitive vis a vis GST-compliant suppliers as the purchaser won t be able to take input credit. Exhibit 3 RM GST on Total Value Selling Price Selling price with GST@12% Profit Purchase RM@12% Cost Addition without GST and availing ITC GST Compliant Supplier 150 18 168 20 20 208 208 x 12-18 = 215 GST Non-Compliant Supplier 150 18 168 20 20 208 208 (Not availing ITC) Cost to Purchaser Net Cost Supplier is GST-Compliant 215 25 190 Purchaser can take credit of Input GST on its sale Supplier is not GST-Compliant 208 0 208 In absence of input credit, non-compliant suppliers will become uncompetitive ICRA Limited P a g e 3
Indian Textile Sector: Impact Analysis of GST Impact: Positive for capital investments Current Scenario: With cotton textile sector coming under GST, companies oriented towards domestic markets will be able to claim ITC on capital goods thereby reducing cost of capital investments Generally, the indirect taxes paid on the capital goods (excise duty and sales tax for domestic purchase; custom duty, CVD and SAD on import) can be set off against the indirect taxes payable on the sales. However cotton based textile manufacturers, which operate under optional duty route in domestic market, the set-off against these indirect taxes, is not possible and accordingly it increases the cost of capital investments. However cotton based textile exporters; typically purchase imported capital goods under Export Promotion Capital Goods Scheme, whereby they take full exemption on payment of custom duties provided they export six times of the duty saved over a period of six years. The other indirect taxes on domestic machinery are to be paid upfront even by the exporting companies and subsequently the refund is claimed. Hence they are unlikely to be impacted under GST. Under GST Scenario: With textile sector coming under GST, textile players which are oriented towards domestic markets will be able to set-off the GST paid on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets. With improved transparency on input taxes which will be fully refunded to exporters, the duty drawback scheme will lose relevance. Impact: Duty drawbacks to lose relevance With Input tax credit chain becoming more transparent and integrated, the tax credit for exporters will become easier and full credit of indirect taxes can be claimed; and the duty drawback scheme, which aims to provide credit of indirect taxes will lose relevance under GST. For the exporters, where the current duty drawback rates are lower than the incidence on indirect taxes on inputs, they will benefit under GST due to improved transparency on level of indirect taxes under GST. Conversely, the sectors, where the drawback rates are higher than actual incidence of indirect taxes on inputs will face challenge on profitability. ICRA Limited P a g e 4
CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 REGISTERED OFFICE 1105, Kailash Building, 11 th Floor, 26, Kasturba Gandhi Marg, New Delhi 110 001 Tel: +91-11-23357940-50, Fax: +91-11-23357014 MUMBAI Mr. L. Shivakumar Mobile: 9821086490 3rd Floor, Electric Mansion, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025 Ph : +91-22-30470000, 24331046/53/62/74/86/87 Fax : +91-22-2433 1390 E-mail: shivakumar@icraindia.com ICRA CONTACT DETAILS CHENNAI Mr. Jayanta Chatterjee Mobile: 9845022459 5th Floor, Karumuttu Centre, 498 Anna Salai, Nandanam, Chennai-600035. Tel: +91-44-45964300, 24340043/9659/8080 Fax:91-44-24343663 E-mail: jayantac@icraindia.com KOLKATA Ms. Vinita Baid Mobile: 9007884229 A-10 & 11, 3rd Floor, FMC Fortuna, 234/ 3A, A.J.C. Bose Road, Kolkata-700020. Tel: +91-33-22876617/ 8839, 22800008, 22831411 Fax: +91-33-2287 0728 E-mail: Vinita.baid@icraindia.com HYDERABAD Mr. M.S.K. Aditya Mobile: 9963253777 301, CONCOURSE, 3rd Floor, No. 7-1-58, Ameerpet, Hyderabad 500 016. Tel: +91-40-23735061, 23737251 Fax: +91-40- 2373 5152 E-mail: adityamsk@icraindia.com PUNE Mr. L. Shivakumar Mobile: 9821086490 5A, 5th Floor, Symphony, S. No. 210, CTS 3202, Range Hills Road, Shivajinagar, Pune-411 020 Tel : +91-20- 25561194, 25560195/196, Fax : +91-20- 2553 9231 E-mail: shivakumar@icraindia.com GURGAON Mr. Vivek Mathur Mobile: 9871221122 Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurgaon 122002 Ph: +91-124-4545300, 4545800 Fax; +91-124-4545350 E-mail: vivek@icraindia.com AHMEDABAD Mr. Animesh Bhabhalia Mobile: 9824029432 907 & 908 Sakar -II, Ellisbridge, Ahmedabad- 380006 Tel: +91-79-26585049/2008/5494, Fax:+91-79- 2648 4924 E-mail: animesh@icraindia.com BANGALORE Mr. Jayanta Chatterjee Mobile: 9845022459 'The Millenia', Tower B, Unit No. 1004, 10th Floor, Level 2, 12-14, 1 & 2, Murphy Road, Bangalore - 560 008 Tel: +91-80-43326400, Fax: +91-80-43326409 E-mail: jayantac@icraindia.com ICRA Limited P a g e 5
CORPORATE OFFICE Building No. 8, 2 nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350 Email: info@icraindia.com, Website: www.icra.in REGISTERED OFFICE 1105, Kailash Building, 11 th Floor; 26 Kasturba Gandhi Marg; New Delhi 110001 Tel: +91 11 23357940-50; Fax: +91 11 23357014 Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 Copyright, 2016 ICRA Limited. All Rights Reserved. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group companies, while publishing or otherwise disseminating other reports may have presented data, analyses and/or opinions that may be inconsistent with the data, analyses and/or opinions in this publication. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. ICRA Limited P a g e 6