Central Goods and Services Tax (CGST) officials in the recent months have investigated over two dozen textile manufacturing companies across the country for mis-classifying textile processing activities and subsequently paying lesser tax.

According to official sources, the CGST department has observed that several textile manufactures are recording activities which involve ‘changing the nature of cloth’ as ‘washing and dyeing’, and therefore are paying lower tax rate of those incomes.

“Textile manufacturers are knowingly misclassifying the services…and paying 5% tax, where they should pay 18%. CGST officials are investigating units of all kinds of firms (corporates, small & medium companies) across India,” said an official. Authorities feel the shortfall in tax-payment is to the tune of hundreds of crores, causing a substantial loss of revenue to the government.

Tax experts say that the GST misclassification in the textile industry arises from ambiguity in tax slabs. “Some manufacturers have allegedly misclassified transformative processes under the 5% category. The issue stems from multiple GST rates, unclear definitions, and potential misuse,” noted Sivakumar Ramjee, executive director, Nangia Andersen.

Krishan Arora, partner, Grant Thornton Bharat said: “This appears to be a clear case of mis-interpretation, with the Department’s stance contradicting the GST legislation’s original intent. In this regard, a definitive resolution is essential to provide much-needed clarity to the industry.”

Since the inception of GST in 2017, India’s textile industry has witnessed profound shifts, with job work services being integral to this transformation. A major point of contention has been the GST classification of textile processing activities like dyeing and printing, say experts.

Initially, tax authorities argued that these processes, which substantially alter fabrics’ essential characteristics, should be taxed at 18%, instead of the current 5% to safeguard government revenues. Building on this, during the 45th GST Council meeting, a proposal to increase the rate of dyeing and printing services to 12% was deliberated. However, it was ultimately dismissed.