GST rate change reviving fortune of small textile units in India

The proposed change in Goods and Services Tax (GST) with effect from January 1 is helping micro, small and medium enterprises (MSMEs) manufacturing polyester and blended fabric to regain their lost ground. The uniform GST rate of 12 per cent will give these textile units an advantage compared to large mills that manufacture yarn and fabric.

The existing GST structure encouraged yarn manufacturers to set up integrated manufacturing plants, as it gave them 7 per cent GST benefit because GST on fabric is 5 per cent while that on polyester, blended and viscose yarn is 12 per cent. To take advantage of this inverted tax structure, most of the man-made yarn manufacturing mills in north India, particularly Punjab, had installed fabric machines and began production.

These large-scale yarn manufacturing companies created big fabric production lines of 50 to 100 machines. As a result, smaller manufacturing units in Ludhiana found themselves difficult to survive in the competition, a source told Fibre2Fashion. “In the last few years, the manufacturing of fabrics has shifted from small units to the hands of large manufacturers.”

But the uniform rate of 12 per cent GST applicable from January 1 will make fabric manufacturing unprofitable for yarn producers. According to industry sources, the large-scale yarn manufacturers have started uninstalling their fabric making machinery with an intention to focus on making polyester and blended yarn production.

“Fabric manufacturing will no longer be profitable for yarn mills, and they have already drastically reduced the production of fabrics,” Sanjay Garg, president of Northern India Textile Mills’ Association (NITMA) and managing director of Punjab-based yarn company Longowalia Yarns Limited, said.

On the proposed changes in GST, Garg said it was necessary to bring uniformity. “There is little possibility that the government will withdraw its decision. The decision was taken by the GST Council, so central government is not in a position to take a call. The decision has started hampering trade, and business activities will not be smooth for the next two-three months.”