Textiles sector is one of the largest employment providers in India. This sector also contributes very significantly to our export earnings. Any decline of textiles consumption or in exports causes serious concern and raises issues of policy ramifications.
The tax policies no doubt have their impact on cost of production, prices, domestic consumption and exports. Textiles has had a chequered history of excise duty changes.
Take only a few leaves from the history. In the Budget 1996-97, in an attempt rationalise the 'lopsided' tax structure, the government imposed basic excise duty at the fabric stage in order to capture value addition and also brought them under the Modvat (now called Cenvat) credit scheme.
Till then, textile fabrics had attracted only additional excise duty in lieu of sales tax. In Budget 2003-04, the handlooms and powerloom sector were also brought in the Cenvat chain.
However, the very next year, the then finance minister changed the entire complexion of duty structure by introducing an optional excise duty scheme for textile fabric producers. The optional duty regime has continued since then.
But in the meanwhile, the across-the- board reduction in the Cenvat rate by 4 percentage points in December 2008 followed by 2 percentage points in February 2009, caused peculiar implications for cotton textiles. Excise duty on cotton textiles got reduced to zero. Perhaps it was not so much by design than by accident.
For those exporters who were paying optional excise it meant denial of input duty refund, thus reducing their competitive strength. It is only to "rectify the situation" that the recent Budget restored the optional rate of 4% for cotton textiles beyond the fibre stage.
Cotton textile exporters who would again opt to pay excise duty can get refund of Cenvat paid at the input stage. The move should therefore benefit this category of exporters. For others, there is no change-the status quo continues. And to be sure, most exporters fall in this category.
In the budget, Cenvat on textile intermediates DMT, paraxylene and acrylonitrile has also been increased from 4% to 8%. The increase follows the policy to bring 4%-rated commodities in the mainstream of the mean Cenvat rate of 8%. Apparently, the increase is necessary to catch with the GST rate, which the government is keen to introduce by April 1, 2010. These intermediates are used for making synthetic and blended fabrics.
Though global meltdown seems largely the culprit for decline in the textile exports, arguably the decline raises suspicion that any increase in excise duty on inputs might hit exports.
But, at least the text book explanation has it that this by itself should not affect exports in as much as manufacturers who opt to pay duty would get reimbursement through rebate/ Cenvat input credit. Others, who opt to remain outside the Cenvat chain, would get compensatory relief through schemes like duty drawback.
Of course, the caveat is: an efficient tax administration. Exporters are generally aggrieved that under the current indirect tax regime, all the taxes and duties are not fully rebated. The government, however, claims that it has put numerous export incentives schemes to neutralise the effect of duties on inputs and finished goods. Perhaps only a comprehensive VAT or GST could narrow down the differences.