The politics of Goods and Services Tax (GST) Bill may take some more time to sort out, but its basic impact on various industries can be analysed beforehand.
In CNBC-TV18's special series Hello GST, today's pick is textile industry, which has enjoyed tax-exemption for all these years.
The natural fibers and cotton are not taxed but because there are duties at the petrochemical level, synthetic ones are taxed, says V Lakshmikumaran, Managing Partner, Lakshmikumaran and Sridharan. However, with the implementation of the much-awaited bill, an input credit will lead to lowered input costs and reduced prices of the finished synthetic textile at the consumer level.
On the contrary, for the natural fibers which are tax-exempt, GST will be an extra cost to the companies and the consumers.
Meanwhile, introduction of this duty will boost Indian textile exports to a great extent easing the prices and making this industry internationally competitive, says Lakshmikumaran.
Hence, integrated companies should see this as an opportunity, as the advent of GST will spur the textile sector with major capital investments bringing the cost of capital goods down, he adds.
Below is the transcript of V Lakshmikumaran's interview with CNBC-TV18's Menaka Doshi.
Menka: Starting today and hereon, we will examine the impact of GST, its proposed design on various different sectors. Today, we are shinning the spotlight on the textile industry which is so far for many decades now enjoyed an excise exemption.
Lakshmikumaran: Let us look at the fibres as a whole. You have got natural fibres like cotton and woollen where the fibres are not taxed because naturally produced goods. As against you have got synthetic fibres and artificial fibres.
Now, there is a duty at the petro-chemical stage. For example capralactam on the manufacture of nylon, purified terephthalic acid (PTA) manufacture of polyester, etc. therefore, that duty is not being available as a credit as of now. When the fibres or the yarn or the fabrics are exempt totally.
So, therefore, it became a cost. Whereas under the GST that is available as a credit and therefore, the input costs will come down and therefore the cash flow position for all these companies will become easier and ultimately, when the finished product is being sold, it actually should reduce the price because the cost of inputs are going to be less.
The only cost will be increasing will be the GST rate that is being charged now or proposed to be charged now. That alone will be the cost and not anything else.
In the case of natural fibres, since the natural fibres namely, cotton and wool are not taxed because naturally produced goods, any tax could be imposed now under the GST regime will be an extra cost to the ultimate consumer.
Now, we must also realise that Indian textile export is one of the vibrant exports to all over the world. And as of now, all these things became cost and therefore, claiming the drawback or any other exemption became so cumbersome with the introduction of GST, the export market will open up, product will become cheaper, it will be internationally competitive and therefore, India can actually increase its share of the export market as far as textiles are concerned.
Menaka: So, you have mostly enumerated positives for the textile sector. The fact that what was so far a cost can be set off as in input credit, the fact that it will give a big boost to the textile exports. But what about the negative of the fact that now GST will be imposed whereas earlier the textile industry was enjoying excise benefits. How do you square off the two and therefore give us a sense of what the net impact will be?
Lakshmikumaran: When people were not paying taxes because it is exempt to bring them under the tax net is always a challenge but once the GST is now brought in and once all of us know that the chain of payment of tax can never be broken, if that is the principle then people have to come in line, there will be some hardship for taking registration and paying taxes etc but this industry can actually go bigger because they can now go in for major capital investments.
Any capital goods being bought for modernisation of the plant or expansion of textile units etc the taxes paid on it will be available as a creditor gain. Therefore capital cost itself will come down for these industries and those who want to plan modernisation and expansion this is the right time when GST is introduced.
I see the integrated companies should seize an opportunity to get into the GST. In fact they should go to the Governor, ask for the GST because it is going to benefit them tremendously.
