The GST Council has done the right thing in referring rate rationalisation of the textiles sector to a panel of State finance ministers for deeper study. Textiles is a complex sector in India, with the entire value chain operating across the length and breadth of the country — from the production of cotton to the apparel stage, or from the production of petrochemicals such as PTA and MEG to synthetic fibre and clothes. The manmade fibres (MMF) sector is faced with an inverted duty structure, with the GST rates on fibre, yarn and fabrics at 18 per cent and 12 per cent, while apparel priced below ₹1,000 is taxed at 5 per cent and those priced higher at 12 per cent. In the case of cotton, the inverted duty problem does not exist; the fibre and yarn are taxed at 5 per cent, whereas the fabric is taxed at 5 per cent if priced below ₹1,000 and 12 per cent if above that rate. In November, the Centre had sought to correct the inverted duty structure in the case of MMFs by raising all finished product rates to 12 per cent and flattening the raw materials prices to the same level (reducing the 18 per cent rate on fibre). Perhaps, in an effort to rationalise rates across the sector, the 5 per cent slab was sought to be removed in the case of cotton fabrics as well. This generated considerable confusion. The rates on both raw material (MMFs) and fabric (cotton) would have been high at a time when input costs, both in terms of raw cotton and petrochemicals, are on the rise for a variety of reasons. The impact of a seven percentage point rise in fabric rates for low end products such as synthetic saris and other dresses in the MMF category, and hosiery items in the cotton category, can well be imagined.

The inverted duty structure problem in MMFs is best addressed by rationalising and lowering rates. That would keep India cost competitive as well. The stakeholders concerned should be clear on the objectives at hand and arrive at a consensus. It appears that in the guise of correcting rate anomalies, the Centre and States had an eye on raising revenues. This is a familiar error — of taking the short-term route to raise revenues through rate hikes. A substantially higher rate of taxes on inputs and finished products will create the temptation to evade taxes. The reduction in GST rates on cotton fibre and yarn seems to have resulted in formalisation. This trend can well reverse if final product duties are raised. This also holds true for MMFs.

The ideal solution would perhaps be to keep all input and output rates at 5 per cent, while retaining the high-end fabrics at 12 per cent. This would be inflation-friendly and boost output, but perhaps would not be that acceptable to governments who are looking for a revenue boost. Hence, the panel can consider a ‘second best’ proposal — a GST of 8 per cent across the board for both input and output that will curb prices without hurting volumes too much. This should, at best, be a temporary measure and the rate should eventually move to 5 per cent. Lower and fewer GST rates across and within sectors should be considered the ideal.