Buying of cheaper cotton yarn by fabric and garmenting units located in Ludhiana and Gurgaon from other parts of India had hit local units due to high value added tax (VAT). The tax concessions announced by the governments of Punjab and Haryana in the 2016-17 budget proposals for the cotton spinning sector will help languishing units.

Punjab has 165 spinning mills with 4.25 million active spindles, and consumes 650,000-700,000 bales (a bale is 170 kg) annually. The Punjab government has said the VAT rate on cotton spinning will be 3.63 per cent, from the earlier 6.05 per cent.

Haryana has decided on zero VAT for cotton spinning; it is currently five percent. The state has an estimated 250,000 spindles, consuming only a part of the 2.5 million bales annual output. The government is offering incentives to enhance the consumption of cotton.

The decision of the state government will provide protection to the Punjab based spinning units against the cheap imports from other states which have lower cost of production.

According to Kamal Oswal, the Vice Chairman and Managing Director of Nahar Industrial Enterprises Limited, Punjab is a major consumer of cotton yarn in north and due to higher tariffs on local manufacturing entities an estimated Rs 9,000 cr worth of yarn is being imported annually from other states. The new tax structure will be a safeguard against dumping from other states to Punjab.

Most of the spinning mills have been under utilizing their capacities for the past few years as there were no takers for the yarn produced at a higher price.

The incentives offered by the emerging industrial hubs in states like Madhya Pradesh and Gujarat had curtailed the market of Punjab spinning sector in the past few years.

Manish Awasthy of Sportking Group said that the VAT reduction will enable a level playing field for the Punjab based players.

There are three large units in cotton spinning in Haryana, DCM Textiles, SEL Manufacturing and HP Cotton Textiles Limited. The manufacturers hope to get higher net investment margins with lower VAT as their VAT outgo will decrease.

Neeraj Saluja, Managing Director of SEL Manufacturing Company Limited said that this will boost sales and profits of the manufacturers catering to domestic market.

Rakesh Goel, CEO of DCM Textiles Hisar said that the exporters will also get the benefit as they will have higher working capital at their disposal. Adding that the time consumed in getting VAT refund will be saved, Goel said that a zero rated VAT would allow the units with twin advantage of tax waiver and input tax credit.

Rajiv Garg, the Managing Director of Garg Acrylics is sanguine as his 3.5 lakh spindles in Punjab would become more competitive profitable with the VAT correction in the state.