Finance Ministry has announced 12% GST rate on MMF, yarn, fabrics beginning January 1st

The finance ministry announced a consistent 12% GST rate on manmade fibre (MMF), yarn, textiles, and garments, resolving the inverted tax structure in the MMF textile value chain.

Currently, the tax rates on MMF, MMF yarn, and MMF fabrics are 18%, 12%, and 5%, respectively.

Taxing of inputs at higher rates than completed goods resulted in the accumulation of credits and the cascading of costs. It also resulted in the piling of taxes at various points of the MMF value chain, as well as the obstruction of critical operating capital for the business.

The GST Council, chaired by Union Finance Minister Nirmala Sitharaman and comprised of state finance ministers, decided on September 17 that the inverted tariff anomalies in the textile sector would be remedied from January 1, 2022.

To give effect to this judgement, the Central Board of Indirect Taxes and Customs (CBIC) announced a 12% GST rate on MMF, MMF yarn, and MMF textiles on November 18.

Although there is a mechanism in GST law for claiming the unutilized Input Tax Credit (ITC) as a refund, experts say there were other issues that resulted in a higher compliance cost. The inverted tax structure resulted in an effective rise in the sector’s taxation rate.

The global textile trade has been shifting toward MMF, but India has been unable to capitalise on the trend since its MMF industry has been stifled by the inverted tax regime, they claim, adding that the adjustment in the anomaly will assist the segment flourish and emerge as a major employment source.

According to EY Tax Partner Bipin Sapra, the textile industry rate modifications are the first of the revisions announced by the GST Council with the goal of correcting inverted duty structures and bringing an efficient tax structure to a specific sector.