The textile sector, which has so far been out of the tax net, has now come under the GST scanner. While the government has tried to impose excise in the past too, it always failed. While there have been protests and strikes against GST, experts feel the government needs to now look into some crucial issues. Till date, significant part of the finances used to take place in cash. Now there are concerns on how they can continue cash trade. The news of e-way bills and squads inspecting goods and invoices has shocked this highly unorganised sector.
The entire value chain, from yarn to finished goods, comprises more than half a dozen processes. Most weaving units or power looms don’t have the capabilities to execute all processes in-house, which requires them to send yarn out for further processing before weaving. Similarly, after weaving, they have to send grey cotton outside for washing and dyeing and processing and again washing. Add to that all transportation involved in moving material from one place to other and back in the factory.
A three-layered approach to branding
This essentially implies for every material movement in the job-work, they will have to do all the paper work and also pay GST on labour charges. If the units doing this job-work are unregistered, then the cloth manufacturer (powerloom owner) will have to pay GST under the Reverse Charge Mechanism (RCM). Reverse Charge Mechanism is a method of collecting tax wherein the recipient of goods and service pays tax on material and service he buys from unregistered dealers. The government’s intent to impose RCM is to increase tax compliance, resulting in higher tax revenues.
To build a higher-value position in functional textiles, Taiwan needs to take a three-layered approach.
The government has time and again failed to collect tax from unorganised sectors like goods transport and small sector industries (SSIs). According to the government, any exemption on account of backward area benefits or SSI limits is a tax leakage, which it is trying to stop. Compliances and tax collections will therefore increase through reverse charge mechanism. This means there will be additional compliance burden on power loom owners.
Taiwan still lacks the associations of industry-leading quality, innovation and sustainability, particularly when compared to manufacturers from Europe, Japan and the US. The textile industry in Taiwan needs to rebrand and focus on a set of strategic messages and supporting marketing communications that can change Taiwan’s perception as a destination for lower-value textiles.
The bug bears
Concern arises from the fact that now they may not be able to move their material for job-work at various places. Section 19 of GST Act read with Rule 43A is clear on procedure for sending goods out for job-work and availing input tax credit on them. For smaller players, it’s going to be erratic. The need is to simplify mechanisms to ensure systematized tax collection. Moreover, power looms operate on low margins, which make it financially unviable for them to hire professional services for tax. Additionally, inverted duty structure is also being looked upon as a hindrance. On the wake of that, the government has now finally GST on job work by 5 per cent.
Beyond all these, transparency in business dealings seems to be a major concern for companies evading tax for long. The government needs to provide proper training and create an awareness on why GST is important. This can be the most effective way to streamline the entire transformation process.