Textile Sector
The textile sector & fabric industries have been prominent contributors to any country’s growth as it depends a lot on lifting up the economy. This particular sector has a major involvement in GDP going up to 10% while giving out excess employment opportunities to the resources, as it requires labor more than usual industries. Nowadays, due to in-house manufacturing textile sectors open most employment chances.
Every primary export is always related to clothing and textile, regardless of the country’s development ratio. It will grow under the GST making a 10% contribution of the total annual export. The growth under GST would affect the cotton value chain of the industry that involves all garments such as shirts, hand towels, trousers, apparel, and other clothing items that most small businesses choose as you have to pay zero duty for it currently. In this blog, we’ll share the major impacts of GST on the textile sector
What is GST In the Term Of Textile Sector?
GST stands for goods and services tax is a value-added tax The goods and services tax (GST) is a value-added tax mainly imposed on most domestically consumed goods and services. This tax is paid by consumers when buying any product or service which is transacted to the government by the sellers. Recently in Pakistan, a huge bulk of goods and a wide range of services are consumed within the domain of the GST regime occupying a crucial place in the current taxation state of the country.
Impact of GST on the textile sector
As textile comes under the most widely consumed product, GST has a huge impact on the textile sector. Let’s get to know them better:
Optional route to paying taxes
It is often highlighted that most value-chained towel manufacturers operate through an optional route. These optional routes will require zero tax without any ITC, which will result in lower duties. The reason behind it is the exemption of cotton which will have lower ITC for cotton spinning factories. All they have to do is apply or optional route to pay taxes for cotton manufacturing without claiming ITC, after that you’ll have to pay zero duty.
Capital Investment
Many textile owners that are mainly domestic market-oriented will have a chance to start paying GST on domestic goods, as the textile companies are rapidly coming under GST and the sales are subjected to it as well. The company owners can also claim the paid taxes on the purchase of raw materials, in-house manufacturing, and distribution as Cenvat credit. This special credit can direct them to carry out further enhancements and up-gradation in the textile industries by equipping the latest and innovative technologies.
Taxes Devolution
The import value of equipping the latest weavers and knitters for manufacturing textile merchandise is becoming more and more expensive as the input is decreased because the excise duty paid isn’t allowed. The major impact of GST here is taxes are being de-valued as every taxpayer can access input tax credit for the taxes paid on capital goods.
There are many sound reasons why taxes experienced devolution as most of them were replaced by GST making it a centralized system for tax-payers. The most reliable reason is that it’s an indirect tax being comprehensive & multi-staged so you don’t have to be worried about paying a number of taxes when you can just pay one GST.
Reduction In Manufacturing Cost
Previously, many indirect taxes including entry tax, OCTROI, central excise, central sales taxes required different agencies to manage their procedures. However, nowadays after the formation of GST, the taxes have been combined to form one. Traders are experiencing a decrease in compliance burden. Will this reduction, the trader can easily concentrate more on expanding the business without getting into complex compliance activities.
Farming Encouragement
As textile production is increasing with every passing day, the demand for raw materials is also increasing. The farmers usually increase the cotton production in order to meet the demands of manufacturers to earn a reasonable profit for their crop. The tax slab for cotton yarn and fabrics comes under 5% GST so that the farmers get the exact price of the hard work and effort that they put into the growth and production of crops.
Readymade garments become inexpensive
In the current consumption and expense of garments and clothing, the GST is imposed to make sure there’s a huge difference. Previously, production tax was 12%, while the current tax slab is 4-5% VAT and 2% Excise. If the tax change kept on including the rates for ready-made garments will also shoot reaching a handsome total as a result.
Impact on exports In Textile Sector
The process of claiming ITC would be streamlined by the GST allowing excess competition within the industry especially concerning the export sector. Due to detailed manufacturing procedure costs and manufacturing delays, traders are preferring not to lean more towards export counting as the major duty processing drawback. The process of duty drawback will lose its importance under GST. Instead of current schemes for duty drawbacks under GST, you’ll be offered the ITC as a refund which will boost the promotion for the export of textile products export. This export promotion scheme is ideally designated for top textile companies in Pakistan, under which the exporters can claim the duty paid exemptions.
Benefits of GST on Textile Sector
There are many different benefits of GST, out of which some are as follows:
- GST can lift up our economy helping us to elevate our GDP in the future. While currently, it has made tax-paying easy for everyone that automatically eliminates any chance of tax fraud.
- Reduces sales-related corruption that isn’t linked to any receipt.
- In the longer run, GST is expected to play an integral role in the deduction of heavy prices for goods & services.
- Small startups that are registered under GST having a profit ratio up to PKR 1 Crores can avail the benefits of GST schemes paying only 1% annually in return.
Conclusion
Although there can be a few disadvantages of implementing GST in the textile industry because of high taxes and decrease in amenities, however, in the longer run, we won’t hesitate to say that GST will be helpful to boost the textile companies of Pakistan by increasing the number of registered taxpayers under a well-regulated system. It can also be said that GST will assist the textile industry is getting more competitive in domestic as well as global markets. Moreover, many opportunities will also be created for durable and sustainable growth.