The Central Sales Tax on the yarn is two percent, while in Tamil Nadu; the Value Added Tax (VAT) is five percent on cotton yarn. Further, fabric is exempted from VAT here. With the high VAT rate on cotton yarn, there is evasion of duty by several powerloom units. They bill the yarn as hank yarn or as fabric to avoid duty.

The Tamil Nadu power loom unit owners have appealed to the State Government to reduce VAT on cotton yarn to two percent.

M. Duraisamy, chairman of Powerloom Development and Export Promotion Council, in a memorandum to the government said that states such as Maharashtra have two percent VAT on cotton yarn.

He said that many units purchase yarn from other States. The powerloom units need to pay high price for yarn because of the five percent VAT. Hence, the Government should reduce the VAT on yarn to two percent and if needed, levy one percent VAT on fabric.

The levy of one percent VAT on fabrics by the State Government and reduction of the duty on yarn will bring down evasion and increase the revenue for the government.

Mr. Duraisamy further said that most of the fabric exports from this region are to the Latin American and African countries which had declined because of withdrawal of some of the export incentives by the Central Government in April this year. However, the Union Government had restored the benefits recently, this is likely to revive fabric exports.