Textile companies under investigation by CGST Officials for Misclassification

Over 20 Textile units across the country have been investigated by CGST officials for wrongly classifying processing activities to avoid tax. As per the official sources, the CGST department has detected that many textile manufacturing companies are performing activities to change the cloth’s nature, such as ‘washing and dyeing,’ through which they are paying a lower tax rate than they should be for those activities.

As per the GST laws, washing and dyeing are treated as ‘job work services’ and are taxed at a lower GST rate of 5%. On the other hand, processes that change the fabric, like printing, bleaching or other treatments that change its main qualities, are taxed at a higher GST rate of 18%. Authorities believe that the amount of tax not paid correctly could be in the hundreds of crores, which means a huge loss of money for the government. This shortfall in tax payment is causing a major reduction in government revenue.

Ever since the establishment of GST in 2017, the textile industry in India has experienced major changes, with job work services playing a big role in this shift. Experts say that one of the main issues has been how textile processing activities, like dyeing and printing, are classified under GST.

At first, tax authorities debated that processes like dyeing and printing, which bring a major change to the fabric’s main qualities, should be taxed at 18% instead of the current 5% to protect government revenue. Following this, during the 45th GST Council meeting, there was a discussion about increasing the tax rate for dyeing and printing services to 12%. However, this proposal was rejected.

The officials have stated that these textile manufacturers are intentionally misclassifying the services and paying a low tax rate of 5% instead of 18%. CGST officials are inspecting units of all kinds of firms, including corporates, small and medium companies across India.

Tax experts believe that the confusion in tax slabs is leading to this wrong classification. These manufacturers are wrongly classifying processes as part of the 5% tax category instead of the higher 18% rate. This problem is arising because there are different tax rates, unclear rules, and the possibility that some businesses are taking advantage of these unclear rules.