Clothes and footwear are expected to become costlier from January 1, 2022, as the current goods and service tax (GST) rate of 5 percent could be revised to 12 percent in order to correct the existing inverted duty structure, people aware of the matter told Mint.

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At present, garments costing up to Rs 1,000 attract 5 percent GST, while 12 percent tax is levied on garments of higher value. Similarly, GST on footwear is priced at Rs 1,000 or less is 5 percent, while the others attract an 18 percent rate.

At present, the textile sector is suffering from severe duty inversion across the value chain that ranges between 5-18 percent. While cotton and natural fibre, as well as yarn, attract a 5 percent GST, tax on man-made fibre stands at 18 percent and on man-made yarn at 12 percent. Fabric attracts only 5 percent GST, but there’s a dual tax of 5 percent for products up to Rs 1,000 and 12 percent for the rest.

In the footwear segment, too, soles, chemicals, consumables, components, services, and capital goods attract 18 percent GST; technical textiles, which are used in the manufacturing of footwear, come under 12 percent tax rate while leather attracts 5 percent. Almost 70 percent of the cost of the footwear comes from these inputs, and a 5 percent tax on end products priced up to Rs 1,000 creates inversion.

The GST Council on September 1 announced its decision to rectify the duty inversion on textiles and footwear value chain from January 1, 2022. The council, however, did not say anything about the tax rates.

A higher duty on raw materials, as compared to the final products, leads to an inverted tax structure, making it challenging for the manufacturer to claim the input tax credit (ITC), and the burden being ultimately passed on to the customers.

Under the ITC system, a GST-registered business is allowed to claim levies already paid on input to manufacture a product or supply a service before making a final sale to prevent the cascading of taxes and to lower the tax burden, the Mint report said.

As of now, a 12 percent GST rate is under consideration for the bulk of products in textiles and footwear segments that will effectively rectify the duty inversions and allow manufacturers to claim the full ITC.

The GST council is expected to continue the dual rate structure -- which will be 12 percent for the bulk of apparel and footwear meant for the masses, and 18 percent for the higher value products, especially on footwear, for social equity.

The person quoted in the report said: “A uniform 12 percent tax is likely to be levied on all garments, but there could be a possibility of two slabs for footwear, 12 percent for items of mass consumption of up Rs 1,000 and 18 percent for the rest.”

(Edited by : Shoma Bhattacharjee)