The textile industry of India has urged the government to place all products across the textile and apparel value chain under the lowest slab of the Goods and Services Tax (GST) of 5 percent to avoid all possibilities of tax evasion. The applicable rates are currently between 5 and 7 percent, depending upon the use of raw materials and production of finished products. The final decision on the rate is yet to be decided, the draft rules propose four slabs -- 5, 8, 12 and 18 per cent of tax under GST.

The Clothing Manufacturers Association of India (CMAI),said in a representation to the Ministry of Commerce that a low GST rate of 5 percent applied uniformly across the sector will boost domestic production, besides facilitating and encouraging voluntary compliance. This would help India achieve its target of generating 35 million jobs and attracting investments worth $200 billion by 2025.

The demand is essentially being made as the textile sector is the second largest employer after farming. It employs 45 million people directly and 60 million people indirectly. The textile sector also contributes 10 percent in India's total manufacturing. Textile items weightage in the Consumer Price Index is of 7 percent.

A uniform GST rate of 5 percent with no exemptions in the sector will remove current blocked input taxes and tax cascading present in the industry, while also providing revenue enhancement for the government. Even with 50 percent compliance from the industry, the tax revenue across the value chain under a uniform GST rate will see and increment of Rs 7,000 crore, said Rahul Mehta, President, CMAI.

A multi-tiered GST rate structure, on the other hand, will lead to distortions in production and consumption. It will also compromise fibre neutrality with producers moving to manufacturing garments made from fabrics that are taxed lower. Such a structure may also lead to disputes in the classification of textile products to different tax categories, experts believe.

GST can transform the textile industry into a single market with a predictable tax system, enabling increased value addition, employment and exports. This scope of GST to carve out a promising future of sustained growth for the textile sector can be achieved only through the application of a uniform low GST rate to the entire sector.

Currently fabrics are exempted from taxes. They account for as much as three–fourth of total consumption spending on textiles, estimated to be around Rs 4.34 lakh crore in 2015-16.

By extending a uniform GST rate to fabrics, which are currently exempted, could result in the government generating Rs 10,850 crore even with only 50 percent compliance.

According to trade sources, a comprehensive uniform low GST rate has the potential of not only removing inefficiencies associated with exemptions and cascading in the sector, but also of increasing the government’s revenue three fold.