GST on Apparel Industry By Adv Surajit Maity


Preface

Indian textiles and apparel have global appeal. Cotton, silk, and denim from India are highly popular in foreign Countries, and with increasing Indian design talent, Indian apparel too has found success across fashion centres around the world.  

India is the world's second-largest exporter of textiles and apparel with a massive raw material and manufacturing base. The textile and apparel industry is a significant contributor to the economy, both in terms of its domestic share and exports. It contributes about seven per cent to industry output, two per cent to the GDP and 15 per cent to the country's total export earnings. The sector is one of the largest job creators in the country, employing about 45 million people directly.                                            

At the organized sector of the Apparel industry needs dedicated work force to maintain the quality, design and fit.

Segment in the Apparel Industry

There are mainly categories / segment in the Apparel Industry like shirts, trousers, T-Shirts, blazer-suits-Coat, sherwanis, wedding-suit, kurti-suits, Inner wear etc.

Process of Manufacturing

There are 3 Major Manufacturing processes

  1. Design/ Creation/ Sample Development
  2. Procurement of Fabric & Accessories (Button,Threads,Lining etc) then cutting/Stitching process.
  3. Quality Control, Ironing, Packing

Historical Taxes (In Direct Tax) In the Apparel sector:

Union Taxes :

Central Excise Duty:  At first Central Excise levy on Readymade Garments falling under Chapter 62 of the First Schedule of the Central Excise Tariff Act, 1985 in the Budget, 2001, the Apparel, Brand Name, Rate of Duty on garments is at the rate of 16% ad valorem.

and thereafter Hide and seek relationship established between union and Apparel Sector and in the year 2004 Such duty withdrawn and further imposed in the year 2011 (MRP Based with Abatement) and withdrawn in the year 2013 and further imposed at 2016 and applicable up to 30.06.2017 till GST introduced. Effective Rate varied since beginning from 1% to 12.5%. (With/Without Abatement)

Service Tax: The relation with the service tax like un wanted guests and liability to be discharged under Reverse charge Mechanism (RCM) effective rate was from 10% to 14.5%.(With/Without Abatement)

State Taxes:

Entry Tax/ Octroi/Local Body Tax (LBT)/Luxury Tax:-

Articles 301 to 307 Constitution of India deal with freedom of trade, commerce and intercourse within the territory of India subject to certain limitations, Entry Tax enacted where the goods entered at the local area of another state and benefit of the Constitution taken by almost all of the state like West Bengal, Bihar, Jharkhand, Karnataka etc and where as Octroi, Local body Tax (LBT) enacted by the state Maharashtra. The effective rate was 1% to 3%.

Luxury Tax also levied by the state on the specific value of the Readymade Garments.

Sales Tax / Value added Tax (VAT):

Sales tax like one point tax and Value added tax (VAT) was applicable before GST regime and most of the state introduced VAT and tax rate was between 5% to 6%  

Goods and Service Tax(GST)

HSN Code and rate of Taxes:-

After long time a reforms under indirect tax regime called GST and Introduced on 01.07.2017 where both Union and state can collect Goods and Services Tax and insertion of Article 246A to amend union list and state list to make the proper arrangement of GST and effective rate and HSN as below:-

Knitted apparel and clothing under chapter 61 of the HSN code, not knitted falls under chapter 62 of the HSN code.

Sale value above Rs.1000/-     @ 12% (6% CGST + 6% SGST)

Sale value below Rs.1000/-     @ 5% (2.50% CGST + 2.50% SGST)

Definition of supply under GST

(a) “supply” as defined under Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) inter alia includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

Time of Supply

Section 12 when a registered person make supply of goods the time of supply would be when the issue of Invoice or Receiving the payment u/s 31 but registered person not required to pay GST on advances received against supply of goods.

Value of Supply

Value of supply is the most important part of the manufacturer of Apparel due to Most of The manufacturer appoints Franchisee/agent and open branches /Showrooms at the different state for retail sale purposes.  

Value of taxable supply as per section 15

Provisions relating to value of taxable supply are as under-

As per this section value of taxable supply is transaction value which is the price actually paid or payable for the supply of goods or services and the price is the sole consideration. Also, where the supplier and the recipient are not related or unrelated parties. So we can say that if the supplier and recipient are not related and the price is the sole consideration then the value of taxable supply is the Transaction Value.

Value of taxable supply where supply between distinct or related persons other than agent ( Rule 28)

The value of taxable supply between distinct persons or where the recipient and supplier are related other than in case of supply being made through agent then value is

Open market value

  • If the open market value is not available then the value of supply of goods or services of like kind and quality
  • If the value of supply is not determinable as per above points then the value of supply of goods or services will be calculated as per rules 30 or 31

However if the goods are as such supplied by the recipient then the supplier has an option to take 90% of the price charged by the recipient from his unrelated customers as value of goods

Value of taxable supply where supply made through an agent (Rule 29)

Where supply is made through an agent then value of supply is

Open market value of goods

Or supplier has an option to take 90% of the price charged for the supply of goods of like kind and quality by the recipient from his unrelated customers as value of goods.

If the value of supply is not determinable as per above points then the value of supply of goods or services will be calculated as per rules 30 or 31

Value of supply as per rule 30

Where value of taxable supply is not determinable as per rules 27,28,29 than it will be calculated as per Rule 30. As per this rule the value shall be 110% of the

  • Cost of production
  • Cost of acquisition
  • Cost of provision of such service

Value of supply as per rule 31

Where the value of supply of goods or services or both cannot be determinable as per Rule 27 to 30 then the same shall be determined as per reasonable means with the principles and general provisions of the section 15 and the provisions of the chapters.

E-Waybill

E-Way Bill is an Electronic Way bill for movement of goods to be generated on the eWay Bill Portal. A GST registered person cannot transport goods in a vehicle whose value exceeds Rs. 50,000 (Single Invoice/bill/delivery challan) without an e-way bill that is generated on ewaybillgst.gov.in. Alternatively, Eway bill can also be generated or cancelled through SMS, Android App and by site-to-site integration through API.
When an eway bill is generated, a unique Eway Bill Number (EBN) is allocated and is available to the supplier, recipient, and the transporter.

Job work

Job work is one of the most important part of the Apparel Manufacturer to reduce Overhead cost and labour unrest most of the Manufacturer opted to be done job work. Means processing or working on raw materials or semi-finished goods supplied by the principal manufacturer to the job worker. This is to complete a part or whole of the process which results in the manufacture or finishing of an article or any other essential operation.

As per GST Act, job work means any treatment or process undertaken by a person on goods belonging to another registered person. The person doing the job work is called job worker.

Value of goods sent by the principal will not be included in the aggregate turnover of the registered job worker.

ITC on goods sent for job work

The principal manufacturer will be allowed to take credit of tax paid on the purchase of goods sent on job work. However, there are certain conditions.

A.Goods can be sent to job worker:

  1. From principal’s place of business
  2. Directly from the place of supply of the supplier of such goods

ITC will be allowed in both the cases.

Effective date for goods sent depends on place of business:
  1. Sent from principal’s place of business- Date of goods sent out
  2. Send directly from the place of supply of the supplier of such goods- Date of receipt by job worker

Effective date is important because it will help to determine the point of taxation if the goods are not returned back within the specified time.

The goods sent must be received back by the principal manufacture within the following period:
  1. Capital Goods- 3 years
  2. Input Goods- 1 year
In case goods are not received back within the period mentioned above, such goods will be treated as supply from the effective date and tax will be payable by the prinicpal.

Accompanying documents

The responsibility for keeping proper accounts /Documents for the inputs or capital goods shall lie with the principal.

Challan

  • All goods sent for job work must be accompanied by a challan.
  • The challan will be issued by the principal.
  • It will be issued even for the inputs or capital goods sent directly to the job-worker.
  • The details of challans must be shown in FORM GSTR-1.
  • Details of challans must also be filed through Form GST ITC – 04.

The challan issued must include the following particulars:

  1. Date and number of the delivery challan
  2. Name, address and GSTIN of the consigner and consignee
  3. HSN code, description and quantity of goods
  4. Taxable value, tax rate, tax amount- CGST, SGST, IGST, separately
  5. Place of supply and signature

Form ITC-04

FORM GST ITC-04 must be submitted by the principal every quarter. He must include the details of challans in respect of the following-

  • Goods dispatched to a job worker or
  • Received from a job worker or

Sent from one job worker to another

 It must be furnished on or before 25th day of the month succeeding the quarter. For example, for Jul-Sep quarter, the due date is 25th Oct.

Input Tax Credit

Section 16 states about the eligibility of ITC on inward supply for both Revenue and Capital nature. Eligibility of taking credit in course of furtherance of business as follows:-

A registered person can claim Input tax credit on the strength of the following conditions: a) He must possess a Tax invoice issued by the supplier of goods or services or both or Debit note issued by a supplier b) He must have received supply of goods or services or both c) He must have paid the tax for it in cash or as input tax as under section 41 of GST Act d) He must have filed proper returns under section 39 of GST Act.

Ineligible ITC:-

Section 17(5) of CGST Act, 2017 talks about ineligible items for input tax credit. Broadly, there are 12 items on which ITC is not available.

  1. Motor vehicles and Conveyances [u/s 17(5)(a)]
  2. Food, Beverages and others[u/s 17(5)(b)(i)]
  3. Membership of a club, health, and fitness center [u/s 17(5)(b)(ii)]
  4. Rent-a-cab, Life Insurance and Health Insurance [u/s 17(5)(b)(iii)]
  5. Travel benefits extended to employees on vacation [u/s 17(5)(b)(iv)]
  6. Works Contract Services [u/s 17(5)(c)]
  7. Self Construction of Immovable property [u/s 17(5)(d)]
  8. GST paid to Composite Dealers [u/s 17(5)(e)]
  9. Input used by Non Resident taxable person [u/s 17(5)(f)]
  10. Input used for personal consumption [u/s 17(5)(g)]
  11. Goods lost, stolen, destroyed and others [u/s 17(5)(h)]
  12. No ITC of tax paid u/s 74, 129, 130 [u/s 17(5)(i)] (Tax paid by way of Penalty, Pending Demand etc.

Anti Profiteering

In terms of Section 171 of the CGST Act, 2017, the suppliers of goods and services should pass on the benefit of any reduction in the rate of tax or the benefit of input tax credit to the recipients by way of commensurate reduction in prices. The willful action of not passing the benefits to the recipients in the manner prescribed is known as “profiteering”.

The Government is committed to ensure all consumers enjoy the benefit of lower prices of goods and services under GST. Under suppliers of goods and services must pass on any reduction in the rate of tax or the benefit of input tax credit to consumers by way of reduction in prices. If this is not done, the consumer's interest is protected by the National Anti-profiteering Authority which may order: (i) reduction in prices; (ii) return of the amount not passed on with interest @ 18% to the recipient; (iii) imposition of penalty; and (iv) cancellation of registration of the supplier.

(Case reference : Impact Clothing (Bengaluru) V/S Director General Anti profiteering, Where the authority found that there was no reduction of tax rate from 01.07.2017 on Readymade Garments  under the GST Act and the authority also observed that the price of the readymade garments also not increased, therefore anti profiteering clause is not sustainable.)

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