by Apparel Resources
20-November-2017 | 21 mins read
It has not been the best year for the textile value chain and many factors, not connected to ‘performance’ have played spoilsport to an otherwise promising year. There is unanimous agreement that the year has been difficult, but each person has his own take on what was the biggest challenge. At every forum, the discussion is centred around how tough the industry has become, and just how long will companies be able to wither one impact after the other. Apparel Online analyses the factors that have been roadblocks in the last 12 months, and though some of the issues have been solved, each has left its mark.
That the global markets are slow and buyers are very cautious of where they place orders and in what quantities, is a fact that no one can deny. But then, that is a reality for garment manufacturers across all sourcing destinations. What is making the business uncompetitive for Indian exporters today is a series of events/policy changes that are specific to the country. Vijay Agarwal, Chairman, Creative Garments sums up the sentiments of most players: “There have been ups and downs; the bottom line of exporters definitely has been affected. Personally, I think last year was certainly a challenging year and the trade is struggling to survive. Most are working hard not to go red and in worst cases, not to belly up,” he says. Running through the events of the past year, the major volleys started with demonetization, creating cash crunch in the supply chain.
Post the announcement on 8 November 2016, regarding the demonetization of all Rs. 500 and Rs. 1,000 banknotes, there was panic among players at different levels as cash has been a major working capital for the industry. In an honest admission, Adil Katrak, Director, Colorlines says: “Demonetization had a significant impact on the industry as a lot of the industry is too ‘unorganized’. The smaller players used to only deal in cash for their day-to-day operations. After demonetization, we found a lot of our vendors struggling in their cash flow and they were forced to change payment terms. This had a carry-forward effect onto our cash flow.”
GST coupled with concerns of duty drawback withdrawal
“Decrease in Drawback/RoSL (Rebate of State Levies) recall with implementation of GST has been among the biggest blows to the garment industry this year,” says Rajeev Bansal, Managing Director, Celestial Knits & Fabs Pvt. Ltd. His views are still echoed by a majority of exporters. With associations and industry bodies pushing for respite, some solution to support the industry is expected, but how competitive it would make the industry can only be analysed, once the announcement is made.
At the implementation of GST, most of the industry was quite positive that this would create less paperwork and make business industry-friendly. The reality seems to be different. Several items that did not fall under the purview of taxation have now been taxed and some of those taxes go as high as 18 per cent. Considering that raw material constitutes approximately 40 per cent of the garment, the new taxation is eating into the margins.
Further, the condition of not allowing the refund of accumulated input tax credit (ITC) at fabric stage (with 5 per cent GST at the fabric stage and its related job works) has a huge impact on processed fabrics, especially cotton fabrics, as the dyes, chemicals, and ETP chemicals are expensive and attract 18 per cent GST. Since more than 80 per cent of textile manufacturing units undertake job work, the inverted duty will have a major impact on the cost of production, inflation, and export competitiveness.
The new duty drawback rates 2017-18
1.2% Cotton yarn
1.3% Cotton grey fabric
2.0% Cotton garment
Taking Tirupur as a case study, CITI (Confederation of Indian Textile Industry) claims that in the post-GST era, knitted fabric processing units, which have a 20 tonne per day production capacity, undertaking dyeing job works, at a rate of Rs. 130 per kg would pay Rs. 3.89 lakh per day as input tax and Rs. 1.30 lakh per day as output tax, thus leaving Rs. 2.59 lakh per day as unclaimed ITC. This works out to be Rs. 9-10 crore of accumulated credit per dyeing unit (20-tonne production capacity) every year. It is argued that if the ITC is not refunded, it would significantly increase the cost and would affect not only the processing segment but also the exports of garmenting and made-ups. Further the industry would be compelled to use imported fabric as indigenous fabric would become costlier due to inverted duty.
During pre-GST regime apparel exporters were availing benefit of EPCG scheme where exporters were allowed to import capital goods without paying any import duty. The scheme was an encouragement for many to invest in new units or go for expansion. But after the implementation of GST, there has been no clarity on the refund proceeds of IGST, due to which the working capital requirement of the exporters have gone up, adding to the cost of production. On the other side, the situation has created a glaring anomaly by making domestic operations attractive compared to exports. Other concerns related to post-GST implementation include the fact that now Duty Credit on MEIS cannot be fully utilized and there will be very high GST rate of 12 per cent on transfer of MEIS licence.
Normally garment exporters are not too much active on social media platforms but the issue of reduced duty drawback rates forces them to express their grief on these platforms. Some exporters have become real sarcastic on Government policies.
The concerns and confusions surrounding GST are multiplied by the indications that Duty Drawbacks will be removed or drastically reduced shortly, which would seriously hinder further business. Already exports have dropped by 3.84 per cent in August owing mostly to the fact that exporters have not been able to confirm orders since, after the implementation of GST, duty drawback and Rebate of State Levies (RoSL) were yet to be decided. There is fear that the trend would continue as the threat of losing drawback to the tune of 5-6 per cent has prevented worried exporters from confirming orders. As per current status after September, the duty drawback rate will come down and the real pinch of GST will be felt from October. “This is going to be a very big threat to the growth of garment exports from the country,” predicts Raja M Shanmugham, President, Tirupur Exporters Association (TEA).
There is also anxiety among exporters that all benefits to them will cease from January 1, 2018, since the country has agreed to and signed up with the World Trade Organization that no incentive would be given after the country’s per capita income reaches US $ 1,000 for three consecutive years, and India has reached that status. Though from an economy point of view it is a positive growth indicator, for the export industry, which is competing on a global platform, the conditions are just getting tougher.
Major reduction in duty drawback rate on readymade garments’ exports hits the apparel industry hard
The new duty drawback rate announced by the Government of India on 22nd September 2017 has added to the woes of the already suffering industry owing to poor global market conditions and rupee overvaluation in the post GST regime. With a significant decrease in the new All Industry Rates (AIR) for garments to 2 per cent from the existing 7.7 per cent drawback, the new announcement has ended the last hope that the industry had towards the betterment of its financial conditions amidst the looming uncertainties of increased working capital requirements and several essential taxes which are not included either in GST or in duty drawback. This major reduction will not only cripple the deteriorating apparel exports as 7000 small and medium enterprises will be adversely affected but also put to stake the employment of 12 million people who are dependent on this sector.
Ashok G Rajani, Chairman, Apparel Export Promotion Council, stated, “I think the present new rates are unacceptable and the Ministry of Textiles should immediately consider AEPC’s recommendation for extending the current transition rates till 31st March 2018, to instil confidence in the sector and to also ensure a smooth transition into GST while also sustaining the employment in the sector.” He further added that exports will witness immense downfall at a time when the industry was positive about a steady recovery because of the peak festival season ahead.
Strengthening of rupee…
Another positive sign for the economy that is playing spoilsport for the exports is the strengthening of the rupee vis-à-vis the dollar. Most exporters are of the view that the sudden strengthening of the Indian rupee has played havoc with planned operations and after GST, This is the single biggest roadblock to competitiveness. “Margins were already constrained: with nearly 10 per cent appreciation of the INR, what is the margin left?” questions SP Mundra, Director, Rajat Collections.
|Duty Drawback for RMG (For both HSN codes 61 & 62)|
|Drawback rate effective from |
15th November, 2016
|Drawback rate effective
|Tariff Item||Product||Rate (%)||Value Cap/ |
Cap/ piece (Rs.)
|Of blend containing |
cotton and MMF fibre
|Of MMF fibre||9.8||115||2.50%||29.3|
|Of Silk (other than |
containing Noil silk)
|Of Blend containing |
Wool and Man Made
GSP benefit to Sri Lanka…
For exporters working in the EU, the Generalized Scheme of Preferences Plus (GSP Plus) status granted to Sri Lanka earlier this year poses a major threat to business. “The newly imposed GST benefit to Sri Lanka has led several of our settled buyers to consider moving business to Sri Lanka so that they get the benefit. Compared to the same period last year, we have seen a drop in order placements this year,” claims Adil.
On May 19, 2017, the EU granted Sri Lanka better access to its market for exports under the GSP Plus scheme. While the scheme is conditional on Sri Lanka making progress on human and labour rights and sustainable development, it will be a big boost for exports to the EU, Sri Lanka’s largest export market. Sri Lanka’s main export to the EU is textiles and apparel, accounting for 62 per cent of the total exports to the regional bloc. Post the GSP Plus, exports in the category is likely to grow by more than 21 per cent (or US $ 424.6 million). This clearly implies that the business would be diverted from other countries which may prove less price-competitive.
The industry is really feeling the pinch and there is no doubt that the delay in concluding the free trade agreement with the European Union has allowed China, Vietnam, and Bangladesh to grab opportunities. And now with Sri Lanka taking a huge step ahead, Indian exporters are further pushed back in the global ranking of preferred destinations. From being the second-largest exporter after China in 2005, India has fallen to the 6th position now, behind countries, like Cambodia, Vietnam, Bangladesh and Sri Lanka… This reality speaks volumes on the decreasing competitiveness of the industry.
“We appeal to the Ministry of Finance to have a relook at the drawback rates applicable for textiles, refund all the blocked, embedded taxes, levies and accumulated input tax credit on fabric especially the processed fabric. The present announcement of the Government on duty drawback rates does not synchronize with the earlier Government announcement of boosting exports and job creation.” P. Nataraj, Chairman, The Southern India Mills’ Association (SIMA)
Though the Dokalam standoff situation has been defused for now, it has taught a hard lesson to the industry which is still sourcing huge quantities of accessories and machines from the country. Sharing his experience, R Sabhari Girish, CEO, Award Associates, operating from Tirupur and Noida says, “Even though tensions were mounting and calls were there from various levels to boycott Chinese products, it has become inevitable that you cannot immediately get an alternative for Chinese accessories, like in the case of the chemical laces, it is highly impossible to get it done indigenously in high volumes. But the recent incident is now compelling us to prepare ourselves to get an alternative arranged for the accessories and fabric.”
The Indian industry has to think beyond China, as the clean-up operation by the Chinese federal Government in 8 provinces will bring the dye houses to a stand still. This can create a problem with the sourcing. The optimistic solution is to take the situation as a challenge and create more competencies within the country, so as to reduce dependency on China. “Even though we believe that we grow on strength rather than on somebody else’s weakness, still if India plays this card properly, many doors will be opened to make it emerge as a sourcing destination,” believes Girish.
Besides these major challenges, many other factors are growing impediments for the industry like revision of wages in many regions, and inclusion of more workers under ESI and EPF, adding to the costs, lowering of the MEIS rate on garments to 2 per cent from the earlier up to 4 per cent for ‘Focus’ countries. Costs have continued to go up year-after-year and due to global economic situation where there is no growth in Western economies buyers are unable to increase the prices, hence exporters are unable to even cover their increased costs.
Some buying houses admit that pitching for business to India is getting very tough and other destinations are being favoured in many categories which earlier were coming to India like men’s shirts, leisurewear, ladies’ blouses, denimwear, to name a few.
The associations have been approaching the Government for more proactive and quick reactive measures to support the industry, but not everyone is happy with the outcome. Many believe that much more could be done and just giving a patient hearing to the industry is not enough.
Actions needed to put India back on the growth path…
There are many suggestions, but the few that all agree would make a difference are: Change in Labour laws, recognition of the industry as a priority industry and provision of benefits in accordance to the status, and FTAs with key countries.
Change in our archaic labour laws have become critical, as the manner in which our labour laws are set out don’t allow either party to benefit and instead seem set to maintain the status quo. There are many changes that need to be done which could help like increasing the salary levels under ESI and EPF so that those employees drawing salaries between Rs. 10,000 to Rs. 15,000 are not required to be covered, besides policy initiatives like compensation in labour wages, PF and ESIC, so that industry remains competitive.
There are many ways in which the Government can incentivize the industry and bring overall ease of business with trust on businessmen, like slash in income and business tax rates, simplification of the whole complex tax structure, increased DBK and MEIS rates; decrease in export credit interest rate; package of capital subsidies to encourage not only current manufacturers to expand capacity but also to attract newcomers to join the industry.
Some additional suggestions coming in from the industry include responsibility of uploading the GST taxes on input which must rest on the supplier and NOT on the recipient of the input goods. The argument is, how can the exporter be responsible if the supplier does not pay the taxes on his invoices, even though they are collected from the recipient? It is also suggested to speed up the infrastructure development of road, rail, and seaports, and allow one-time voluntary settlements of business and revenue related disputes in the courts lying unsettled for many years.