In ICRA's view, a 12% (lower rate) recommended by the Dr. Arvind Subramanian Committee is likely to have a negative impact on the textile sector, especially the cotton value chain, which is currently attracting zero central excise duty (under optional route); unlike the man-made fibre sector, where the fibre attracts excise duty at the manufacturing stage (unlike cotton). Hence there is an incentive for the downstream players in manmade sector to avail the Input Credit Tax (ITC).ICRA points out that the most of the cotton based textile players in the value chain operate through the optional route, thereby resulting in lower duties. The key reasons for the same are exemption on cotton and hence the lower ITC for cotton spinning mills; as a result the cotton yarn manufacturers opt for the optional duty route without claiming ITC and pay zero excise duty.Mr. Anil Gupta, VP, Corporate Sector Ratings, ICRA Ltd said, "With an optional duty structure at the cotton yarn stage itself, the downstream sectors, i.e. weaving, processing and garments also operate under the optional route. This is reflected in the less than 1% effective excise duty rate applicable to ~480 spinning and weaving companies rated by ICRA, which accounted for ~Rs 57000 crore revenue during FY2015."On the positive side, under GST, textile players which are oriented towards domestic markets will be able to ITC on domestic capital goods (but not the import duty) as their sales will be subject to GST. Accordingly, this will reduce the cost of capital investments and hence will be positive for the players operating in domestic markets."With GST on textile, the textile value chain will become more organised as it will make GST non-compliant suppliersuncompetitive vis a vis GST-compliant suppliers, as the buyers won't be able to take ITC," he adds."Due to the reduced tax advantage of cotton yarn vis a vis man-made yarn, there can be a gradual shift in the domestic textile industry, which currently operates with a fibre mix of cotton: manmade of 60:40; as against a global average of cotton: manmade of 40:60. However, the above impact will be dependent on the final rates which will be applicable to the sector," he reiterated.The exports will be zero rated under the GST as there will be transparency and availability of full ITC for exporters which is currently being provided by duty drawback schemes. Accordingly the duty-drawback will lose its relevance under GST; however sectors where the drawback rates are higher than actual indirect taxes on inputs may face profitability pressures, an ICRA assessment states.Textile industries play a very important role in the development of the Indian economy with respect to GDP, Export promotion, employment, etc. It is the one of the oldest manufacturing industry in India. It is the second largest industry after agriculture which provide skilled and unskilled employment. In this sector, 100% FDI is allowed by the Government under the Automatic Route. Textile Industry contributes more than 10% in Total Export. Textile Industry is divided into Two Segment, firstly Unorganized and Secondly Organized. Unorganized sector consists of Handloom, handicraft, small and medium-scale mills and Organized Sector consist of spinning, apparel and garments segment which apply modern machinery and techniques.Mainly Two types of Indirect Taxes are Central Excise Duties and Service Tax. Service is not levied on Textile since it comes under Goods.Under current taxation system, textile products are mostly exempted or are taxed at very low rate. State Governments have stop levying Sales Tax after the discontinuation of Additional Excise Duty.Some Pertinent Issue in Current Taxation Under Textile IndustryInput Tax Credit Breakup: The textiles industry comprises of both regular and composition taxpayers. Most of the industry are being in Composition Segment. Numerous transactions in the textiles industry flow from the unorganized to the organized sector and vice versa. Where Regular/Registered Taxpayer purchase goods from composition Taxpayers, they are not eligible for Input Tax Credit, thus breaking the Cenvat Credit chain. Input Tax credit paid on the previous transaction is included in the cost of the product making the product costly.Small Business Compliance Cost: composition scheme Taxpayer is hesitant to join Credit chain as it increases the compliance cost of engaging professional to meet their Tax obligation.All Other Taxes to be Included in GST: Supply chain of Textile Industry is loaded with input and output across state boundaries to reach the ultimate consumer. Octroi and Entry Tax are the bottlenecks, credit of which are not allowable, thus form the part of the cost. Subsume of octroi, entry tax, entertainment tax, luxury tax, etc. into GST will remove the cascading effect at the distribution stage.GST ImplicationAfter the application of GST, there will be an increase in the effective tax rate to have a negative impact on the textile sector as compared to current taxation.As CGST and SGST rates are likely to be higher than the current textile sector rate, this will result in the higher revenue to the Central and State Government and Textile Prices will increase. Services are used in Input, this effect would be nullified as all input tax will be rebatedIn the current taxation, taxes are being paid on input are being added to cost as the finished product are exempt from Taxes. In GST, Textile Output will be taxed and Input Tax will be rebate whether in the case of export or for domestic use making taxation transparentTaxes paid on purchase and installation of capital asset and equipment can be claimed as Cenvat credit. This will lead to up-gradation and expansion of the Textile Industries with latest Improve technologies.Compliance cost will be improved and reducedFiscal barriers will be removed with the movement of Textile Input and output taxes from one states to anotherUnder GST, All Fiber will be treated in same way. No discrimination between cotton fiber and man-made fiber is there till now in the defined GST StructureSummaryOverall GST will necessarily change the current structure of Textile Industries. GST will result in transparency, the tax burden will shift to the ultimate consumer by claim the credit of taxes paid on input. Still, GST rate is to be determined, it may lead to the higher tax burden on textile units. But the impact on demand will be less or neutral. It will encourage widespread development and growth in Indian Textile sector. The future for the textile industry looks promising, buoyed by both strong domestic consumption as well as export demand.