Come July 1st, a new system of taxation known as the Goods and Services Tax or GST is set to be in motion which in return is expected to accelerate the ‘Make in India’ movement and help increase the country’s GDP growth rate among many of its potential outcomes.
What is it?
Popularly endorsed as a ‘One Nation, One Tax’ system, a host of indirect taxes will be replaced by one single tax — the GST, which will be levied when a consumer buys a product or avails themselves to a service.
Tax is the charge levied by the government on citizens for a product, income or service. Taxes on personal or corporate income are called direct tax and those levied on the price of goods and services are called indirect tax. In India, taxes like the VAT, service tax, customs duty, octroi, luxury tax and excise duty that were once levied by the central and state government are all set to be replaced by one tax system, namely the GST. This ushers in greater transparency for consumers and benefits manufacturers too — instead of liaising with multiple tax authorities, the manufacturer gets to deal with a single entity.
One of the major distortions of the Indian taxation regime is the cascading effect of taxes, a.k.a. tax on tax. GST would reduce the said cascading effect of taxes by integrating the tax systems of central and State governments. Additionally, GST is to be paid only on the value addition and not on the value that includes the taxes paid earlier — this input tax credit mechanism allows set off of taxes paid across the value chain and eliminates the cascading effect of taxes and results in lower net tax liability.
How will it affect the fashion industry?
Under the existing structure, at each point of sale, additional taxes are applied to the after-tax value of each goods and services. The main purpose for GST is to eliminate this compounding effect by fixing the final tax rate, where goods will fall into one of the four rate categories of 5%, 12%, 18%, and 28% respectively.
In the production cycle of a product, at the present moment, there exists a tax structure at every level up until the consumer purchases it, with the cost increasing after every stage. With GST, there will be no tax on tax at every stage of value addition, the second tax can be offset by the first set of tax added and so on, hereby relatively bringing down the cost for the consumer.
At the e-commerce end, the scenario is set to get expensive. Currently, e-commerce websites do not collect tax in any form, but under the GST, they will collect tax at a fixed rate of 1 per cent while paying to the sellers listed on their websites — a move that has now been deferred but will come into force at a later date. However, the deliveries are about to get speedier as the retailers will not have to file a separate paperwork for each state, the otherwise extra paperwork imposed by states will end and make deliveries faster.
The textile industry is said to have a positive impact as compared to the current tax policies. The effective tax incidence on man-made fibres and cotton is in the range of 5-7 percent, while blended textiles fall under the 11-14 percent range, says a report by ratings agency ICRA. As for wool and silk textiles, the GST rates are lower for them at 5 per cent, compared to current tax of 8-10 per cent, according to media reports.