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NEW DELHI : Garments and footwear may become costlier from January as plans are afoot to raise goods and services tax (GST) on these products from 5% to 12% to correct the existing inverted duty structure, two people aware of the development said.

The GST Council had on 17 September announced its decision to correct the duty inversion on textiles and footwear value chain from 1 January. At the time, it did not disclose details of the tax rates. Higher duty on raw materials as compared to finished products leads to an inverted tax structure, making it difficult for manufacturers to claim input tax credit (ITC), and the burden is finally passed on to the consumer.

Under the ITC system, a GST-registered business is entitled to claim levies already paid on inputs to manufacture a product, or supply a service, or both, before making a final sale to prevent cascading of taxes and to lower the tax burden.

A 12% GST rate is under consideration for a bulk of products under the two segments—textiles and footwear—that will effectively correct duty inversions and allow manufacturers to claim the full ITC, the people cited above said on condition of anonymity.

“As manufacturers are expected to pass on the ITC benefit to consumers, the impact of raised tax on the end price will only be marginal," one of the two people said, adding a final decision will be taken by the GST Council.

The finance ministry did not respond to an email query.

The GST Council may continue the dual rate structure which will be 12% for the bulk of apparel and footwear meant for the masses and 18% on higher-value products for rich customers, especially on footwear, for social equity, the second person said.

“A uniform 12% tax is likely to be levied on all garments, but there could be a possibility of two slabs for footwear, 12% for items of mass consumption of up to 1,000) and 18% for the rest," the person said. Currently, apparels costing up to 1,000 attract 5% GST, while a 12% levy is imposed on garments of higher value. Similarly, GST on footwear priced at 1,000 or less is 5%, while others attract 18% levy.

The textiles sector is currently suffering from severe duty inversion across the value chain that ranges from 5% to 18%. While cotton and natural fibre, as well as yarn, are in the 5% GST slab, tax on man-made fibre is 18% and man-made yarn is 12%. Fabric attracts only 5% GST, but garments attract dual tax of 5% (for products priced up to 1,000) and 12% (for the rest).

Similarly, in the footwear sector, soles, components, chemicals, consumables, services, and capital goods attract 18% GST, technical textiles (used in the manufacturing of footwear) have a 12% tax and leather attracts a levy of 5%. As 70% of the cost of footwear comes from these inputs, a 5% tax on end product costing up to 1,000 creates inversion.

M.S. Mani, senior director at consultancy firm Deloitte India said the duty inversion creates situations where refunds are sought for higher taxes paid on inputs, leading to working capital issues for the impacted businesses and increased scrutiny work for GST authorities. “The move is in the right direction as manufacturers will be able to reduce their working capital and improve their cash flows, and consumers could benefit too if the manufacturers pass on the benefits from improved cash flows through lower prices on the products," Mani said.

Sunil Kumar, DGM at tax research and advisory firm Taxmann said the proposed changes “would be a sign of relief" for the two sectors. “Further, it would also slightly increase the price of footwear and garments and thus, would have an impact on a large number of consumers," he added.

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