GST – Impact on Handloom Sector and Handloom Weavers

1.0 Goods and Services Tax

The Goods and Service Tax (‘GST’), considered India’s biggest and most historic tax reform,
was introduced on 1st July, 2017. It is widely expected that GST is going to change market
dynamics. Apart from organizations requiring to capture appropriate data for computation and
compliance, under GST regime, the hitherto shadow economy in business would be forced to
join mainstream, ending the time of fake bills.

1.1 Problems with previous Taxes

• Multiplicity of taxes
• Multiple taxable events - Manufacture, Sales & Services
• Cascading effect- Restriction in credit availment
• Varied compliances under statutes
• Different Compliances under varied states
• Lack of automation in SME sector
• Cash economy thriving in a big way

1.2 GST Structure

GST is levied by both Central and State or provincial governments whereby a Central Goods and
Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable
value of every transaction of supply of goods and services.

For within the State (Intra-State) supplies both CGST and SGST shall be levied with CGST
Portion payable to Central Government and SGST Portion payable to respective State. For across
the States (Inter-State) supplies IGST (CGST + SGST) shall be levied and collected by centre
out of which the SGST Portion shall be transferred to respective consumer State.

1.3 GST Rates

A four tier GST tax Structure of 5%, 12%, 18% and 28% has been decided by the GST Standing
Council. In addition to the formula that lower rates for essential items and the highest for luxury
and de-merits goods, some goods would also attract an additional cess.
• 5% - Essential Goods
• 12% - Standard slab rate
• 18% - Standard Slab rate
• 28% - De-merit and Luxury goods

2.0 Textile Industry - Features

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

Textile Industry in India is one of key sectors in Indian economy with a direct linkage to the
overall growth of Indian and global economy. Textile plays a major role in the Indian economy
India's textile market size (USD billion) It contributes 14 per cent to industrial production and 4
per cent to GDP. With over 45 million people, the industry is one of the largest source of
employment generation in the country.

The industry accounts for nearly 15 per cent of total exports. The Indian Textile industry is
amongst very few industries that is vertically integrated from raw material to finished Products
(from fibre to retail). With potential growth, opportunities in both the global and the domestic
market it has leveraged its strong manufacturing position to achieve considerable expansion.

2.1 Previous Taxes on Textiles

Most of Modern Automated Indian Textile Industry (MAITI) products are either exempt or are
taxed at a relatively lower rate and are extensively subsidized under different central and State
governments. The textile industry is taxed both under the central and state regime. The following
were the indirect taxes applicable to the textile industry, before GST:

1. Central Excise Duty: The Central Government levied excise duty under the Central Excise
Act, 1944. The tax was charged on the manufacture of goods and were meant for domestic
consumption. Special excise duty and Additional duty of excise were also charged under the
said act. The domestic textile industry has an optional route to pay zero excise duty across
various stages of the value chain, provided they don’t claim the Input Tax Credit (ITC) at any
stage. Cotton based industry was exempt from payment of excise. Apparels have been
attracting excise duty at effective rate of 1.2% (@ 2% with abatement @ 40%). Tax was
payable at the time of removal.

2. Value Added Tax (VAT): State VAT is a form of sales tax levied by the State
governments on intra-state sale of goods. VAT is applied by the State governments at
each stage of sale, with a particular apparatus of credit for the input VAT paid. Currently
in most of the states VAT on apparels is at the rate of 4 to 5 percent. Fabric
manufacturing in India is largely carried out through the SSI sector, where many of the
companies operate under the composite scheme of taxation (applicable with turnover of
upto Rs 1.5 crore). ITC cannot be claimed on purchases from suppliers under composite
scheme. Tax payable at the time of sale.

3. Central Sales Tax (CST): The Central sales Tax was a tax levied by the Union
government but collected and retained by the State governments of the originating State
on inter-state sale of goods. It is currently charged at the rate of 2% on the value of sale
of goods. Tax payable at the time of sale.

4. Entry Tax: Entry tax was an account based tax levied and collected by state
governments on entry of goods into a local area for consumption, use or sale therein.

5. Customs Duty: Custom duty in India is defined under the Customs Act, 1962 and
enables the government to levy duty on exports and imports, prohibit export and import

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

 of goods, procedures for importing/exporting and offences, penalties etc. Under customs
duty different taxes are levied like Basic customs Duty, Additional Customs Duty (CVD),
Protecting duty, Anti-dumping duty and Safeguard duty. Custom duty on exports is
normally nil rated except for raw cotton and cotton waste, imports are leviable to CVD
and special CVD.

6. Export Incentives: These are in the form of drawback, rebate/ refund of taxes paid and
several incentives in the form of scrips which could be sold.

2.2 GST Rates on Textile

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

3.0 Handloom Sector: Features1

Handloom sector is a very ancient industry in India. Features of this sector vary across India. In
some parts, it has attained the status of a mature industry, and in other parts, it is still an
enterprise confined to the needs of the particular home. Given the changes in the society in the

1
Vision of Handloom Industry 2014, by Dr. D. Narasimha Reddy

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

last 100 years, there has been growth of mechanized textile production across the world,
principally driven by Industrial revolution and by Western countries. Gradually, due to
competition and for other reasons, handloom has lost much of its markets, and is almost non-
existent in most countries. However, handloom sector is still a force to reckon with in India, and
some of the South Asian and Asian countries such as Srilanka, Bangladesh, Thailand, and
Cambodia.

In India, textile sector today comprises four important segments viz., modern textile mills,
independent powerlooms, handlooms and the garment sector. Though there is a huge, informal
tailoring enterprise it has never been studied or considered for any kind of attention, leave alone
policy. There are also sub-sectors like textile machinery manufacturing and spinning sectors,
which form part of the textile sector.

Among all these, handloom sector being the oldest has different features in different parts of the
country. It employs the largest number of people. However, it is considered as a sunset industry,
and there is an air of inevitability given the relentless march of mechanization, modernization
and sophistication.

However, there are many advocates among the Indian population, who support the cause of
handlooms for various reasons, including ideology, philosophy, sheer love for handloom
products, economic arguments, etc... Irrespective of the policies, projects, and aspirations arising
out of various quarters, handloom sector is undergoing changes which are impacting on the
livelihoods of the handloom weavers. Some of the factors are internal and some are external
factors related to the growth of modern textile sector.

Handloom weavers are known for their knowledge, innovation and brilliance in designs.
Weaving is now considered almost an art form, considering deployment of skills and knowledge.
This sector, estimatedly, provides employment for more than fifteen million people and is second
largest rural employment provider next to agriculture. In Andhra Pradesh, there are more than 3
lakh handloom weaving families. In comparison with other traditional rural sectors, handloom
weaving is a full-time family profession, involving all the members of family.

Handloom Sector The per capita purchase of cotton textiles in

• Employment to 30 million
• Mainstay of rural and semi-urban
employment
• Exports reaching Rs.4,000 crores
• Annual turnover of Rs.50,000 crores
• Market demand of Rs.1 lakh crores
metres in 2011-12.
handloom sector is 0.88 metres and aggregate
consumption at all India level is estimated to
be 989 million metres. National level
consumption of pure silk textiles produced on
handlooms was 116 million metres and 6
million metres in woollen in 2006. Handloom
fabric production reached 6.9 billion square

3.1 Economic and Social Importance of Handloom Sector

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

A few years in the last decade were very difficult for the handloom industry with significant
declines in production and employment. The handloom sector is predominantly a household-
based industry. Enterprises of less than 4 employees account for 60% of the workforce in the
handloom sub-sector and produce almost 50% of value added.

In India, the handloom industry is concentrated in about 15 States, accounting for about three
quarters of Indian production of handmade textiles, including Andhra Pradesh, Tamilnadu,
Kerala, Karnataka, Rajasthan, West Bengal, Uttar Pradesh, followed by Gujarat. On average, the
handloom sector plays a more important role in the economy and employment of various Indian
states.

As regards the performance, more than 80% of handloom production in value is sold on the
domestic market and about 10 percent in external markets despite limited access to many third
markets. However, there remain significant impediments to trade in handloom products,
especially in some of the largest and more competitive countries, and the handloom industry
could increase production and exports to those parts of the world when the impediments are
lifted. By comparison with manufacturing as a whole, it is worth noting that domestic markets
are of higher importance for the handloom industry.

In general, on the basis of developments in productivity, labour costs, quality of products, and
international trade performance, it can be said that the handloom sector remains competitive
internationally and has improved its position. Many of the States are very dependent upon the
handloom industry in terms of value added and employment, and the existence of a huge
productivity gap poses major challenges to policy makers.

3.2 Characteristics of Handloom Sector

• The handloom sector has been subject to a series of radical transformations over the
last few years, due to a combination of technological changes, evolution of the different
production costs, and the emergence of important international competitors. Such
changes are likely to continue in the foreseeable future, and the definitive elimination of
subsidies which has been applied for the past two decades will bring in additional
competition.
• In response to past competitive challenges, the handloom industry has undergone a
process of restructuring and technological progress. Handloom weavers have
improved their competitiveness by substantially reducing or ceasing mass production and
simple fashion products, and concentrating instead on a wider variety of products with a
higher value-added. Moreover, handloom weavers are world leaders in markets for body
wraps (esp. sarees), as well as for high quality textiles with a high design content.
• Competitiveness has also been retained by sub-contracting, or relocation of production
facilities, to semi-urban and urban areas. The competitive advantages of the handloom
sector are now found in a focus on quality and design, innovation and technology, and
high value-added products.
• At the same time, globalisation and technological progress have led to the need to think
of clustering strategy. Still playing an important role for some activities, cooperation at
local, district or regional level has increasingly proved adequate to ensure that the chain

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

 of production remains at close geographical proximity to the markets. Therefore,
clustering of its diversified activities is now also based on a wider geographical area.
• Handloom products generally have a positive quality mark-up. Equally the handloom
industry has a leading role in the development of new designs. These trends towards
higher value-added products need to be continued and accelerated, if the handloom
sector in India is to remain competitive.

3.3 Handloom Budgets

Handloom sector invests more than Rs.25,000 crores on accessing cotton yarn, and Rs.9,500
crores on dyes and chemicals every year2. Handloom production is dependent on private money
lending to the tune of Rs.35,000 crores, and pays interests between 18 to 24 percent. Handloom
sector gets a paltry budget allocation of Rs.328 crores in 2014-15 and Rs.604 crores in 2017-18.
Given the employment potential and its contribution to GDP, government has to increase the
budget allocation to atleast Rs.5,000 crores, and ask NABARD to increase the credit availability
for handloom sector from the current Rs.75 crores to Rs.10,000 crores.

• Handloom budget is a mere 0.003 percent in national budget in 2013-14, whereas it was 0.03
percent of the national budget 2010-11. It was 0.3 and 0.4 percent in the past two years. Thus,
there is continuous decline in real terms. This trend continues in 2014-15 as well – it is now 0.03
percent.
• Investment on handloom sector per metre was a mere 48 paise in 2008-09, while for the non-
handloom 62 paise.
• In comparison, government provides tax breaks, subsidies and incentives for MAITI (modern,
automated Indian Textile Industry), other than budget allocations. This exceeds Rs.1,00,000
crore in the last nine years.
• In the last 18 years, budget allocation for handloom has been decreasing gradually and
continuously. It does not get even the normal, automatic inflationary increase of 10 percent, year
on year.
• While there is continuous reduction in the allocations for handlooms, utilization of the
allocation is also not proper. In 2011-12, the revised budget allocation was Rs.744.73 crores, but
actual expenditure did not go beyond Rs.656.14 crores. In 2012-13, expenditure was Rs.793.26
crores, while the allocation was Rs.2,960.50 crores – a mere 26.7 percent.
• Though the average downsize revision is 6.4 percent for eleven years, from 1997-98 to 2007-
08, per year the variation ranges from 4.0 percent to 23.5 percent.
• The downsize revision in more for handlooms than for non-handloom sector.
• After 18 years, from the year 1997-98, the average percentage of handloom allocations in the
total Ministry of Textiles budget has come down to 10.89 percent, while in 1997-98 it was 27
percent.
• Per capita allocation of the government on handloom weavers is very low, compared to any
other sector.
• Government has ignored the recommendation of Working Group on Handlooms for 11th Five
year Plan, which recommended about Rs.4,000 crores.

2
Donthi Narasimha Reddy, Denial of Public Funds Handloom Sector in Union Budgets, Economic and Political
Weekly, Vol. I, No.6, 2015

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

4.0 GST on handloom: Issues and Challenges

1. Break in input tax credit chain: Handloom sector uses different production methods.
Numerous transactions in the handloom products flow from the unorganized to the
organized sector and vice versa. Since handloom weaver is not expected to be registered
under GST, they are not eligible for Input Tax Credit, thus breaking the GST chain, in the
beginning itself. However, at later levels, Input Tax credit paid on the previous
transaction is included in the cost of the product making handloom product costly.

2. Compliance Cost: GST increases the compliance cost of engaging professional to meet
their Tax obligation. With 9 GST online forms to be filled every month, 4 quarterly, half-
yearly and 2 annual returns, almost 115 forms have to be filled every year. This adds to
the cost of the product.

3. Job work under GST: Hand-made products, including embroidering, hand knitting, etc.,
produced or manufactured on job work, has initially been taxed at 18 %, and reduced to
12%. Therefore, it is the GST-registered supplier and not job worker who is liable to tax
under GST regime. However, reverse charge is too complex to be used here.

4. Branded goods: A handloom weaver cannot use a brand name on goods since he/she
is not registered.

5. Inclusion of credit into the GST: Supply chain of handloom sector is loaded with input
and output across State boundaries to reach the ultimate consumer, on deferred payment
basis. Paperwork and the burden of upfront payment on the primary handloom product
aggregator is huge.

6. Glitches in product and warp is very common in handloom products, as they are human-
made. However, in GST, if the input is compromised, lost or destroyed, no ITC is
available.

7. Further, quality control is an integral part of handloom weaving. Finished handloom

products used for quality control or kept as sample or swatches are likely to be taxed
under GST. If the handloom products are sent out for quality test, GST would be an
additional compliance burden. There should be clarity on this, since it does not amount to
supply.

8. Returning of sarees or under-quality or unsold goods after specified period of their supply
will amount to taxable supply in GST. The return of such goods can be made under the
cover of Debit Note/Credit Note and included in the return before end of September or
filing of the annual return, whichever is earlier. In such cases, the supplier can reduce his
GST liability provided the recipient reverses the credit. The returns made after this
period, would amount to supply and GST is required to be charged by the shahukars. This
needs to be verified.

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

 9. There are concerns of transitional issues to handloom sector, which was not taxed before,
in its centuries of history.

10. There is no clarity on the classification of handloom products as on date, and also the
implications of Handloom Reservation Act.

11. Handloom weavers, cooperatives and master weavers, who buy equipment are liable for
18 percent taxation. For a handloom weaver, purchase of Capital Goods is a rare activity
wherein substantial investment is involved. Normally, a GST-complaint entity will transit
to GST with such high tax paid capital goods and is expected to use them for further
supply in GST regime. Since there is no expectation that handloom weavers should be
registered under GST, there is no clarity on how this payment can be claimed as Input
Tax Credit.

12. Registration for Assessees with Aggregate Turnover Over Rs. 20 Lakhs: Section 22
on the CGST Act, 2017 provides that every supplier shall be liable to be registered under
this Act, if his aggregate turnover in a financial year exceeds Rs. 20 lakhs.

In case a handloom weaver, or a commission agent, or shahukaar, is earning interest

income from Fixed Deposit Receipts of Rs. 15 Lakhs and a Rental income from renting
of immovable property of Rs. 6 Lakh, he would need to take registration and collect GST
on rented property (as it covered under definition of supply). However, interest income
on FDR is not liable to GST. On inclusion of interest income in aggregate turnover,
unnecessary burden is imposed on various assessees including handloom weavers.
Complying with the law under such a situation is very difficult.

13. Definition of Books of Accounts: Section 35 of the CGST Act provides that every
registered taxable person shall keep and maintain, at his principal place of business, as
mentioned in the certificate of registration, a true and correct account of production or
manufacture of goods, of inward or outward supply of goods or services or both, of stock
of goods, of input tax credit availed, of output tax payable and paid, and such other
particulars as may be prescribed. It would be helpful to define the term “Books of
Accounts” for the purpose of GST.

14. Matching, reversal and reclaim of input tax credit, under Section 42(1) of the CGST Act.
As can happen in handloom sector, there is no provision to cover situations arising out of
supplies between registered and unregistered supplier. In a monopolistic situation, a
registered supplier is likely to collect ITC from the unregistered supplier, and yet claim
ITC. A specific provision be added to cover this aspect for the purpose of better
compliance by supplier.

15. Section 9(4) of CGST Act, 2017 provides that the central tax in respect of the supply of
taxable goods or services or both by a supplier, who is not registered, to a registered
person shall be paid by such person on reverse charge basis as the recipient and all the
provisions of this Act shall apply to such recipient as if he is the person liable for paying
the tax in relation to the supply of such goods or services or both.

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

 This provision would work against small handloom weavers as being unregistered
suppliers of handloom products. Registered assessees might not be interested to
purchase from them while they might lose onto their business and customers.

From the above, it can be seen that the GST rate is not revenue neutral for handloom products.
The new tax rate may change the structure of production and market relations among the
handloom weavers, master weavers, primary handloom product aggregators, super stockists,
wholesalers and retailers which will be huge in certain handloom clusters. The net surplus on
account of imposition of tax rate or structure is required to be passed on to the consumers.
However, there are elements in the GST regime, which can burden the handloom weavers.
Otherwise, also the cost of handloom product is likely to increase making them less competitive
in the retail markets. Other consequences:

• Estimated tax base for khadi and handloom sub-sector, within 9 sub-sectors of Indian
textile industry, is very low. It is a mere 1.2 percent.

• Handloom goods, produced within the jurisdiction of consumption, with GST, would be
forced to be sold outside that jurisdiction. With cost escalation, it would be a necessarily
export item.

• Handloom production is geographically fragmented, with each product having its

uniqueness, style and features. GST on handloom reduces the sustainability of this
geographically fragmented production and leads to loss of diversity.

• GST will in effect have a dual monitoring structure—one by the States and one by the
Centre. Hence, there will be a greater probability that compliance cost will increase.

• With GST, handloom product prices are likely to increase by 2.5 % on a reasonable
prediction basis, and may go as high as 50 percent.

• Because the weights of products in the clothing consumption basket are different due to
fibre, make, quality, etc., price impacts on handloom products in textile markets will be
relatively higher, if not steep. This is likely to induce a shift of consumers away from
handloom products.

• It would be appropriate to do a handloom product-wise benefit – cost analysis for

determining the impact of GST on prices, consumption and market segment shifts.

5.0 Implications of Goods and Services Tax (GST) on Three Sub-sectors

A Report3, commissioned by Union Ministry of Textiles, notes, Khadi and Handlooms, Cotton
textiles, and carpet weaving would be in a relatively disadvantageous position because of GST. It

3
Report on ‘Implications of Goods and Services Tax (GST) for Indian Textiles Sector’, For Ministry of Textiles,
Ernst and Young, and Wazir, 2014

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

has estimated a price increase of 7.7 percent. Consequently, the report says because of this price
increase there is a change in demand by – 2.2 percent, indicating a shift away from consumption
of handloom goods. Domestic demand is estimated to fall.

Since the effect of GST is on the price and therefore on the consumer, an important related issue
concerns the equity implications of the transition to GST. The net effect on demand will also be
positive on some segments, notably, miscellaneous textile products, readymade garments,
artificial silk and synthetic fibre textiles. These differential impacts will induce substitution
effects within the textile sector in consumption and production away from cotton textiles to man-
made fibre based textiles.

The Handloom industry currently produces both low as well as high value added products. The
uniform GST rate is likely to be significantly higher than the current effective tax rate of the
Handloom industry. While demand for high value-add handloom products with low price
elasticity can be expected to remain largely unaffected, low value-add handloom products with
higher price elasticity may witness a fall in demand. Therefore, producers of low value-add
handloom products can be expected to upgrade to the powerloom sector, resulting in increased
productivity, quality and returns on investment. This can be classified as a process efficiency
effect.

The cotton textile industry presently has a lower effective tax rate as compared to the synthetic
textile industry. The uniform GST rate is therefore likely to lead to higher increase in prices of
cotton textiles as compared to synthetic textiles. As a result, cotton textile manufacturers can be
expected to increase blending of synthetic fibres with cotton fibres. This can be classified as the
fibre-neutrality effect.

The handloom industry plays an important role in the country’s economy, being one of the
largest economic activities and providing direct employment to over 65 lakh people engaged in
weaving and allied activities. The sector is a substantial contributor to the overall fabric
production in India. The fabric production from handloom sector was 6.9 billion square metres in
the year 2011-12, forming ~11% of the country’s total fabric production. Majority of this
production is consumed in the domestic market and a minor percentage of overall production
gets exported.

Handloom products have always faced competition from power loom sector, where the cost of
production is much lower. Slowly handloom industry has moved towards production of more
value added products, where the price of the product is judged more by its aesthetic and heritage
value. Silk Saree from Varanasi, scarf from Barabanki, home furnishing from Bijnore, shawls
from Kullu, ikat sari from Sonepur and Bargarh, cotton saree from Chanderi are few such
examples of value added handloom products.

Based on the RNRs, we have estimated a net effect on demand to be negative but the estimated
magnitude is small at (-) 1.4. as given in Table 7.3. The majority of the handloom products are
value added products and we do not perceive any considerable market shrinkage of handloom
product.

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

Zero rating can be one option to avoid increase of tax burden on handloom products. Zero rating
is possible only if all input taxes are refunded. But it will be quite difficult to manage its
administrative process. The zero rating policy option has been tried earlier by different
jurisdictions, who have found it difficult to administer and monitor input tax refunds.

The other option is to subject it to the standard GST rate while facilitating the handloom weaving
process through different interventions, which will help in decreasing the cost of production or
increasing the value of product. Some of the possible interventions are mentioned below.

1. Raw material bank: Yarn constitutes more than 60% of the overall cost of handloom products.
Typically major yarn spinners are not located within or near the handloom clusters and they do
not sell yarn directly to the weaver/master weaver/cooperatives. There are a number of agents
involved in the process of delivering the yarn from mill to weaver, which increases the price of
yarn and sometimes creates artificial shortage of raw material availability, which in turn
increases the price of yarn. Development of raw material (yarn) bank at a cluster level will not
only ensure continuous supply of raw material but will also help in reducing the price of yarn.

2. Supply of handloom parts at subsidized rate: Many times handloom weavers can’t change the
defective handloom parts due to its high price. This reduces the efficiency level of the handloom
weavers and also deteriorates the quality of the products. Supply of handloom parts at subsidized
rate will help handloom weavers to improve their efficiency, which will help in reduction of cost
of production. Also, an improvement in quality will enable the handloom weavers to charge a
premium for their product.

3. Improved Dyeing facility: Color fastness is the most common quality problem with handloom
products. Many consumers hesitate to purchase handloom products due to this problem. Usage of
age old dyeing facility is the reason behind such quality problem. Installation of better dyeing
technology at cluster level will help in solving this quality issue, which will help in increasing
the demand of handloom products and its price as well.

4. Product & design development: Supporting handloom weavers in product and design
development will help them in reducing the cost of manufacturing and developing higher value
added products, which can be sold with higher premium. This facility can be provided to
handloom weavers through training or opening facility centre at the cluster level.

It is important to mention here that Ministry of Textiles is implementing many such interventions
through different schemes. The scale and coverage of those interventions might be expanded to
improve its effect on overall handloom industry.

The main policy options, which may be considered for specific segments are as follows: (i) Zero
rating, (ii) Exemption, (iii) Lower rate of tax and (iv) Standard rate of tax with appropriate
subsidies

6.0 Impact of GST on Handloom sector

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

GST will impact on business strategies of shahukaars (investors), master weavers, cooperatives,
and retailers and suppliers. The impact will be more on consumers, who are going to receive
higher prices for handloom products.

• All, including Master Weaver, wholesaler, retailer and seller have to upload invoice wise
details of supplies in their respective returns and the GST system will match them. If they
do not reconcile then it will be added to the liability of the seller. This will lead to
additional compliances.

• Tax Collection at Source (TCS) provisions shall be attracted on the primary form of
handloom production model, where both master weavers and supplier act on principal-to-
principal (P2P) basis. It will lead to a lot of compliances and penalty provisions shall be
applicable in case of non-compliance.

• Most of handloom weavers, master weavers and wholesalers are small and medium
businesses. Government has introduced composition scheme under GST Act. Section
10(2) of CGST Act prescribes that if a person is engaged in making any supply of goods
through master weaver who is required to collect tax at source, then he cannot opt
composition scheme. However, handloom sector is yet to come to terms with taxation,
leave alone the complexities of composition scheme. The advantages of composition
scheme is one need to file only 5 returns per annum as against 37 in a normal case.

• As per section 24, handloom master weavers, cooperatives and persons who supply
handloom goods are required to be registered necessarily, if not compulsorily, under this
Act. Thus the handloom weaver and commission agents having turnover less than Rs.20
lakhs who is not otherwise required to be registered, will have to be compulsorily
registered under this Act.

• As per the registration provisions under Chapter-VI of CGST Act, every business
involved in handloom production is required to get registered in each State in which they
making taxable supplies. Since handloom products usually are popular in other than
home State, sellers expect order from all the States, and as such they are liable to obtain
registration in all the States.

• Handloom Market places, including exhibitions, will have to make necessary changes to
their ERPs to handle the new requirements emerging due to GST

• Each Order or Invoice will now need to carry HSN or SAC code as well. However,
initially government is lenient for HSN or SAC codes. Handloom products, listed
under Handloom Reservation Act, 1985, need different HSN or SAC codes. GST
should respect this Act.

• Place of Supply has to be determined and mentioned in every invoice.

• Invoice issued by vendor should contain comprehensive details as per Rule 46 of Chapter
VI of CGST Rules.

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com

 6.1 Fibre Mix

There is a likely to be a huge impact of GST on fibre mix in Indian textile industry. India’s
current strength lies in the production of cotton yarn, which accounts for around 74% of total
spun yarn production in India. The production of cotton yarn in India has recorded an annual
average growth rate of around 6.5% during FY2005 to FY2009. The dismantling of Multi fibre
Agreement (MFA) in 2005 has provided a boost to India’s yarn exports. India is a net exporter of
cotton yarn. GST is likely to depress natural fibre production and increase Man-made fibre
production.

Cotton, Silk, wool, jute and other natural fibres are important raw materials on which the
handloom industry production is dependent. Organic cotton and organic fibre production
supply chains are also eagerly looking forward to linkages with handloom industry in order
to respond to environmental standards4. Important challenge for the National Fibre Policy
is to find an equitable balance between growth of different fibres, and an assessment of how
such a growth would impact on the user industry.

7.0 Relief for Handloom weavers

1. Handloom Sector and its products should be exempted from GST. In this regard,
GST Council decision on 18th May, 2017, of nil GST rate for handloom sector may be
restored.

2. In a worst scenario case, both Central and State Governments may have to come out with
suitable, simple and appropriate compensatory measure till the sunset period.

3. GST will burden a very large number of handloom weavers without any substantial
revenue to the Government.

4. There should be definition of hand-woven and hand-made products in the GST Act.

5. Since most handloom products, other than value-added sarees, with intricate designs and
skill-related, are intra-State, State governments can exempt handloom products from
SGST.

6. Alternately, purchases of handloom goods from handloom weavers by shahukars or

master weavers or commission agents, who are unregistered and below a threshold limit
of say Rs.40,000, be exempted based on declaration.

4
Declaration at the National Workshop on “National Fibre Policy: Small Producers in Fibre Supply Chains”,
Hyderabad, 30th March, 2010, Chetana Society.

Dr. D. Narasimha Reddy, Independent Textile Expert, nreddy.donthi16@gmail.com