GST breaks back of handloom sector

In India, textile sector today comprises four important segments viz., modern textile mills, independent powerlooms, handlooms and the garment sector. There is also a huge, informal tailoring enterprise. Handloom weavers are known for their knowledge, innovation and brilliance in designs. This sector is the second largest rural employment provider next to agriculture. It is a full-time family profession.

The per capita purchase of cotton textiles in handloom sector is 0.88 metres and aggregate consumption at all India level is estimated to be 989 million metres. National level consumption of pure silk textiles produced on handlooms was 116 million metres and 6 million metres in woollen in 2006. Handloom fabric production reached 6.9 billion square metres in 2011-12.

GST rate will increase prices of cotton textiles, over synthetics. As a result, blending of synthetic fibres with cotton fibres gains traction. There is likely to be a huge impact of GST on fibre mix in Indian textile industry. India is a net exporter of cotton yarn. GST is likely to depress natural fibre production

A household-based industry, it is concentrated in about 15 States, accounting for about three quarters of production, including Andhra Pradesh, Tamil Nadu, Kerala, Karnataka, Rajasthan, West Bengal, Uttar Pradesh, followed by Gujarat. More than 80% of handloom production in value is sold domestically and about 10% in external markets. Handloom sector invests more than Rs 25,000 crore on accessing cotton yarn, and Rs 9,500 crore on dyes and chemicals every year.

Handloom production is dependent on private money lending to the tune of Rs 35,000 crore, and pays interests between 18 to 24 per cent. Yet, it gets a paltry budget allocation of Rs 604 crore in 2017-18. Handloom budget is a mere 0.003 per cent in national budget in 2013-14. Public investment on handloom sector per metre was a mere 48 paise in 2008-09, while for the non-handloom it 62 paise. Per capita allocation is also low.

GST on handloom

There are concerns of transitional issues to handloom sector, which was not taxed before, in its centuries of history. Imposition of GST on handloom is ill-conceived, because the estimated tax base is very low – a mere 1.2 per cent.

Price impacts on handloom products in textile markets will be relatively higher, if not steep, because the weights of products in the clothing consumption basket (of CPI) are different due to fibre, make, quality, etc. A shift of consumers away from handloom products is expected.

A 2014 Textiles Ministry report estimated a price increase of 7.7 per cent. Consequently, it sees a change in demand by – 2.2 per cent, indicating a shift away from consumption of handloom goods. Post-GST, handloom product prices are likely to increase by 2.5 per cent on a reasonable prediction basis, and may go as high as 50 per cent. Thus, it can be a mere export item. Price elasticity of low and high value-added products would be affected the worst, stressed by ‘fake’ handloom products, from powerlooms, mills and China.

GST is not revenue-neutral for handloom products. It will change the structure of production and market relations. Primarily, and summarily, cost of handloom products is likely to increase making them less competitive in the retail markets.

Unregistered weavers are not eligible for Input Tax Credit, thus breaking the GST chain, in the beginning itself. Further, if the input is compromised, lost or destroyed, no ITC is available. Usual practice of returning of under-quality or unsold goods after specified period of their supply gets GST.

Importantly, there is no clarity on the classification of handloom products as on date under GST. Handloom products, listed under Handloom Reservation Act, 1985, need different HSN or SAC codes. GST should respect this Act.

Textile equipment attracts 18 per cent taxation. There is no clarity on how this payment can be claimed as Input Tax Credit by weavers. Unnecessary burden is imposed on handloom weavers because of GST turnover provisions. In a monopolistic situation, a registered supplier is likely to collect ITC from the gullible weaver, and yet claim ITC.

On the other hand, to avoid the burden of reverse charge, registered assessees may refuse to procure from weavers.GST reduces the sustainability of geographically fragmented handloom production leading to loss of locational diversity. GST will impact business strategies of shahukaars (investors), master weavers, cooperatives, retailers and suppliers. The impact will be more on consumers, who have to pay higher prices. Handloom market places, including exhibitions, will have to make necessary changes to handle the new requirements emerging due to GST.

In general, GST rate will increase prices of cotton textiles, over synthetics. As a result, blending of synthetic fibres with cotton fibres gains traction. There is likely to be a huge impact of GST on fibre mix in Indian textile industry. India is a net exporter of cotton yarn. GST is likely to depress natural fibre production and increase man-made fibre production. Cotton, silk, wool, jute and other natural fibres are important raw materials for weavers. Organic cotton and organic fibre production supply chains would be stressed.

Relief for weavers

GST will burden a very large number of handloom weavers without any substantial revenue to the government. GST Standing Council should exempt handloom sector and its products. GST Council decision on 18th May, 2017, of nil GST rate for handloom sector may be restored. One would wonder what made the Council reverse its decision in a short time.

In a worst scenario case, Central and State governments may have to come out with suitable, simple and appropriate compensatory measure till the sunset period. There should be definition of hand-woven and hand-made products in the GST Act. Since most handloom product sales are intra-State, State governments should exempt them from SGST.

By Dr D Narasimha Reddy