The taxation structure for textiles in the pre-GST era was primarily divided into the CentralExcise 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 afragmented 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 abrand name (primarily Branded Ready Made Garments) having a Retail Sales Price ofRs. 1000 and above was 2% (without Cenvat) and 12.5% (with Cenvat), with the tariffvalue 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 payableif the manufacturer opted to avail CENVAT, else the trader/manufacturer had theoption of clearing goods without payment of Central Excise duty though no Cenvatcredit of inputs, input services and capital goods was allowed. In case of cotton, thereis zero duty at the fibre stage and in case of MMF,Central Excise duty of 12% islevied at the fibre stage.2.

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Service Tax: Textile sector avails various input services for manufacturing itsfinished products The service tax so paid on such input services cannot be set offsince presently this sector is largely under duty exemption. Hence such service taxpaid on input services becomes a cost. Service Tax on service in relation to textileprocessing is currently exempt.State Taxes:3. VAT/ Central Sales TaxMost 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 compositionscheme in many States.4. Entry taxTextiles such as cotton, woolen or silk or artificial silks are liable to entry tax in someStates like Karnataka, at the rate of 1% which adds to the purchase cost.