In the view of Indian Credit Ratings Agency (ICRA), a 12% duty recommended by the Arvind Subramanian Committee is likely to have a negative impact on the textile sector especially the cotton value chain that is currently attracting zero central excise duty (under optional route) unlike the man-made fibre sector. Hence, there is an incentive for the downstream players in man-made sector to avail the Input Credit Tax (ITC). ICRA has pointed out that most of the cotton based textile players in the value chain operate through the optional route that results in lower duties. The key reasons for this are exemption on cotton and hence, lower ITC for cotton spinning mills. As a result, cotton yarn manufacturers opt for optional duty route without claiming ITC and pay zero excise duty. As Anil Gupta, VP, Corporate Sector Ratings, ICRA points out “With an optional duty structure at the cotton yarn stage itself, the downstream sectors, i.e. weaving, processing and garments also operate under the optional route. This is reflected in the less than 1 per cent effective excise duty rate applicable to 480 spinning and weaving companies rated by ICRA, which accounted for Rs 57000 crores revenue during FY2015.” He adds, with GST on textile, the textile value chain will become more organised as it will make GST non-compliant suppliers uncompetitive vis a vis GST-compliant suppliers, as buyers won’t be able to take ITC. “Due to the reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry, which currently operates with a fibre mix of cotton: manmade of 60:40; as against a global average of cotton: manmade of 40:60.”

Under GST, textile players who are oriented towards domestic markets will be able to avail ITC 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.

Exports will be zero rated under GST as there will be transparency and availability of full ITC for exporters which is currently being provided by duty drawback schemes. Accordingly, the duty-drawback will lose its relevance under GST. However, sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures, an ICRA assessment states.