The leather and footwear industry is eagerly awaiting an incentive package which is likely to be along the lines of the one offered to the textiles sector last year. Prateek Kukreja looks at the industry in this light, as also the context now provided by the recently-introduced GST regime.

India's leather and footwear industry is geared up for a revamp as the incentive package for the industry will soon be placed before the Union Cabinet for approval. The scheme is supposed to be on the lines of the special package, introduced for the garment industry last year and shall be implemented over a period of three years. The department of industrial policy and promotion (DIPP), which mooted the proposal in May this year, sought ₹4,000 crore package, including both tax as well as non-tax benefits for leather manufacturers. The finance ministry is likely to approve ₹2,500 crore for the industry.

The scheme is seen to be a part of the recently overhauled Indian Leather Development Programme (ILDP), with an aim to increase export of leather and its products to the tune of $15 billion by 2020 from the current $7 billion. Currently, the sector provides employment to about 30 lakh people. With a view to increase jobs as part of the reform agenda, the package may include relaxations in labour laws as well as provisions for imparting skills to the rising workforce.

We have recently migrated to the Goods and Services Tax (GST) regime, under which most leather goods like bags, handbags, wallets, articles of apparel and clothing accessories, etc, have been classified as luxury items, and will be taxed at 28 per cent. This accounts to more than double the 13.5 per cent tax levied on leather products earlier. This is likely to hit the sector adversely.

India is currently the world's second largest producer of footwear and leather garments in the world and accounts for 9 per cent of world's footwear production. The sector is also a significant contributor towards overall manufacturing employment and holds huge potential for job creation. According to an estimate, a ₹1 crore investment creates jobs for about 300 people in this sector. Higher tax rate under the new regime is likely to bring about slowdown and may lead to loss of jobs.

The Economic Survey 2017 has rightly pointed out that the tax and tariff policies in the country create distortions, particularly in the leather and apparel sectors, which otherwise provide immense opportunities for creation of jobs for the vulnerable sections of population, especially women. The package set to be introduced amidst the new tax regime, should therefore aim at providing enough incentives for the leather manufacturers so as to offset distortions brought about by the rise in costs.

The key measures introduced as part of the special package for textiles last year included certain additional benefits such as duty drawback scheme for garments, some amount of flexibility in labour laws in order to increase the productivity as well as tax, along with some production incentives for job creation in garment manufacturing. While the measures were introduced efficiently and successfully, the available data on exports suggest that there is, in fact, very little to cheer about. Textile and clothing exports increased by a mere 0.9 per cent during FY16-17. The major reason for this stagnation in exports has been the lack of competitiveness. Faced with strict labour regulations, low skilled workforce, high costs of technology and infrastructure and above all, a complex structure of taxes and tariffs, domestic manufacturers often find it difficult to compete in the international market. The challenges or bottlenecks faced by the leather industry are similar to that of the textile sector.

 

The incentive scheme will come in the wake of what has been one of the major tax reforms that the country has seen in the recent past. Therefore, it becomes all the more important to make sure that the provisions of the scheme complement the new tax regime and provides the manufacturer with incentives to increase production, contributing towards increased exports and job creation.

Leather exporters would particularly be eyeing the duty drawback scheme under the new incentive package, which was introduced for the textile sector as part of the special package. Under the duty drawback scheme, the duty paid by the exporter on the products they import, is refunded in the form of duty drawback. As per the recent post-GST notification by the CBEC, the extant duty drawback scheme is to be continued for the initial three months, in order to allow smooth transition.

However, there still exist certain levies, like electricity tax, market committee fees and VAT on fuel, which are not subsumed in GST. These often act as export barriers, since they significantly increase the cost of production. Thus, the package for leather industry must encapsulate provisions to benefit exporters, which could in some way bring down the costs associated with production. These initiatives, if implemented, can go a long way in reviving growth and generating gainful employment in the leather industry. It is therefore hoped that the ministry of commerce and industry will get the new scheme approved and speed up the reform process to boost leather exports.

About author:

Prateek Kukreja is a research scholar at the Centre for the Study of Regional Development, JNU, New Delhi.