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Does indirect tax policy adversely affect
August, 04th 2009

Duties price out man-made fibres, the share of which is already low

Globally, man made fibres account for over 60% of fibre consumption. In India, they account for around 40% of total fibre consumption and the share of man-made fibre based products in our textile exports is less than 25%. One of the major reasons for low utilisation of man-made fibres in India is uncompetitive cost of fibres and duties play a major role in making our man-made fibres expensive.

Two producers account for most of the polyester production in India and in the case of viscose there is only one major producer. This situation allows fibre producers to fix their prices on the basis of import parity. In other words, producers calculate the duty paid landed price of imported fibres and fix their prices at that level, in order to make imports an unviable option. In the process, our spinners are actually paying customs duty even for domestically produced fibres.

Basic Customs Duty applicable to man made fibres is 5% and excise duty has been increased from 4% to 8% in this years Central Budget. With Additional Customs Duty, Education Cess and Countervailing Duty, the total incidence of duty on imported fibres amounts to 18.62%. On top of this, Anti Dumping or Anti Subsidy Duties are also applied on imports quite often.

The increase of 4% in Excise Duty alone has made our fibres costlier by Rs 2,800 to Rs 4,500 per tonne, for various man made fibres and their blends. Fibre is the primary raw material for the textile industry. The increased burden of duty will have to be borne by the textile industry; they will not be able to pass it on to their consumers because of slackness in demand in the context of economic slowdown. Our textile industry is already in a crisis and the increased duty burden would only cripple it further.

The only objective of the duty increase seems to be to generate additional income for government. And any move for revenue mobilisation through increased duties on primary raw materials of labour intensive industries can only be compared with killing the goose that lays the golden egg.

An efficient tax administration will solve most of the problems

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.

 
 
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