The taxation structure for textiles in the pre-GST era was primarily divided into the Central
Excise duty and VAT, CST and local body taxes which are levied and collected by the states,
with the overall incidence of such taxes varying across different states. This resulted in a
fragmented input tax credit chain, leading to embedded taxes and cost escalations.
The Tax structure on Textiles consisted of the following levies:
Central Taxes:
1. Central Excise Duty on all goods falling under Chapter 61, 62 and 63 bearing a
brand name (primarily Branded Ready Made Garments) having a Retail Sales Price of
Rs. 1000 and above was 2% (without Cenvat) and 12.5% (with Cenvat), with the tariff
value of 60% of Retail Sales Price to account for value-addition after manufacture.
Optional Central Excise duty route has been available since 2004 in case of cotton,
MMF and Spun yarn at the yarn, fabric and garment stage, wherein duty was payable
if the manufacturer opted to avail CENVAT, else the trader/manufacturer had the
option of clearing goods without payment of Central Excise duty though no Cenvat
credit of inputs, input services and capital goods was allowed. In case of cotton, there
is zero duty at the fibre stage and in case of MMF,Central Excise duty of 12% is
levied at the fibre stage.
2. Service Tax: Textile sector avails various input services for manufacturing its
finished products The service tax so paid on such input services cannot be set off
since presently this sector is largely under duty exemption. Hence such service tax
paid on input services becomes a cost. Service Tax on service in relation to textile
processing is currently exempt.
State Taxes:
3. VAT/ Central Sales Tax
Most of the States in India have exempted textiles and fabrics from the levy of VAT /
Central Sales tax. Garments including textiles are being subject to lower rate of VAT/
Central Sales tax in most of the States. It is in the range of 5%- 6%. For small players,
the option of paying taxes at concessional rates is also provided under composition
scheme in many States.
4. Entry tax
Textiles such as cotton, woolen or silk or artificial silks are liable to entry tax in some
States like Karnataka, at the rate of 1% which adds to the purchase cost.