GST credit curbs on fabric splits industry


Sewing background with color threads, meter and scissors

NEW DELHI: The government’s move to allow input tax credit to fabric makers, using raw material with higher GST rates, had brought an all-round cheer last week. But a recent notification is causing some heartburn.

At last weekend’s GST Council meeting, ministers had agreed to allow input tax credit to fabric makers, which face a 5% levy, but pay 15% on some of the yarn, the key input. There is no issue for the cotton fabric makers. In cases involving polyester yarn and fabrics, there is an inverted duty structure, which has now been addressed through credits for taxes paid on the raw material. The credit can be used to clear the tax dues on the fabric when it is sold.

Implementing the decision, the government has said that accumulated input tax credit, which remains unutilised after payment of tax up July, 2018, will lapse.

“If this notification is implemented, accumulated credit of over 1,000 crore with fabric manufacturers will lapse and those having multiple products such as garments will not be able to use the credit balance. The government needs to delete the condition otherwise flood of litigations will start,” said tax lawyer R S Sharma.

Tax consultants, however, said that the government move is justified as input tax credit for all taxes paid kicked in after GST was launched. It also allowed for refund in case of a sector with an inverted duty structure (where the final output has lower levy than the input), which was not the case before July 1, 2017 when GST kicked in.

“Some of the garment manufacturers were hoping for a bonanza after the Council’s decision as they thought that even pre-GST tax credits can now be used,” said a consultant with a leading firm. Eligibility for claiming of refund of inverted duty is available only prospectively, which has been the principle for all GST rules, he added.

Government officials, however, said that the decision to provide a relief for the inverted duty structure was a major gain for the textile industry, going forward.

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