The planned GST hike on garments priced less than Rs 1,000 from January 1, 2022 is likely to increase prices of 80 per cent final products, opine experts. The government had decided to increase the Good and Services Tax (GST) rate on readymade garments and fabrics in September this year. The planned hike is likely to affect almost 85 per cent of the garment market in India, as per reports. It will create a greater stress on the working capital requirements of the industry, especially the Micro, Small and Medium Enterprises.
Majority of industry to be impacted
The government had proposed the hike to correct the problem of Inverted Duty Structure faced by a small segment of the textile value chain. The duty structure involves levying higher taxes on input and lower tax on output of the final product. Though the GST Council has addressed this issue for many other industries, it continues to persist for footwear, textiles, pharmaceuticals and fertilizers.
However, the issue impacts only 15 per cent of the textile sector while the proposed GST hike is likely to increase prices of 85 per cent products, say experts. Furthermore, the continued shutdown of retail outlets in the country is likely to force domestic garment industry to continue operating at 65 per cent of pre-COVID levels.
Effect on employment levels
The industry also faces a 20 per cent decline in employment as most units have either scaled down or shut operations due to the pandemic. Though the festive season looks optimistic and encouraging, it may not last long as the GST hike on clothes below 1,000 may severely hit the textile industry, particularly MSMEs, says Kumar Rajagoplan, CEO, Retailers Association of India.
As a solution, the Clothing Manufacturers Association of India has urged the government to impose a uniform 5 per cent GST across the entire value chain. The sharp increase in cost of raw materials such as yarn, fabric, fuel, packaging materials and transportation is likely to hit sales even more.
Sales drop as raw material costs surge
Sales are likely to drop by over 50 per cent as people have lost their capacity to spend. The prices of raw materials have also shot up significantly. In such a situation, hike in GST rates to 12 per cent will hit the industry hard, adds Sajjan Raj Mehta, Karnataka Hosiery and Garments’ Association.