CUSTOMS DUTY


To Reduce Customs duty on Textile Machinery to Zero

There is huge demand for textiles machinery in India. However, the domestic industry does not have the required production capacity to cater this growing demand.


The present rate of Basic Customs Duty is 5% on a selected list of Textile Machinery and 7.5% for the rest and the total duty works out to 28.34% and 31.33% respectively which are quite high.


China and Pakistan who are our main competitors in textiles & clothing have made huge investments in the installation of latest equipment and state- of- the- art technology. In fact, Pakistan announced zero duty on imports of textile machinery in June 2005 itself. India should match their efforts and permit duty free import of all textile machinery with a view to sharpening its competitive edge by modernizing its plant & machinery.


In view of this, it is suggested that import duty on textile machinery should be reduced to zero so that the requirements of textile & clothing industry which cannot be met by domestic machinery manufacturing industry can be met through imports, at competitive prices.


To withdraw customs duty on import of Furnace Oil (FO) used for generating power for captive consumption by textile units


In the Union Budget - 2010 announced in February 2010, basic duty of 10% was restored on other refined petroleum products.


In this regards, power cost in India is considerably higher than the costs in our competing countries. Due to issues related to supply of power through State Electricity Boards in terms of both quantity and quality, a large number of textile units have set up captive power plants using FO. Prices of FO have increased substantially making captive power plants uncompetitive. Replacing this is a very costly preposition.


It is therefore suggested that the customs duty on import of Furnace Oil used for generating power for captive consumption by textile units should be withdrawn.


To exempt imports of textile machinery from the levy of 4% additional duty of customs (Special CVD)


In the Budget 2006, additional duty of customs (Special CVD) was imposed on all imports at 4%, (in lieu of state and local taxes). Most of the textile units have opted for zero duty option and as such these units are unable to set off this 4% additional duty of customs (Special CVD) on imports against excise duty. It is therefore suggested that imports of Textile Machinery should be exempted from the levy of 4% additional duty of customs (Special CVD).

 

EXCISE DUTY


Abolish excise duty on textile machinery, spares & components.


To make textiles products competitive in the international market, excise duty on textile machinery, spares and components should be abolished. This will also improve the investment climate and will encourage more investment in the textile machinery sector.


To reduce excise duty on FO


Rising cost of power/electricity continues to be a factor affecting the export performance. The present rate of basic excise duty on is 14% which is very high. It may be mentioned that due to non-availability of sufficient and quality power from state electricity distribution companies, and in view of the fact that adequate power supply cannot be ensured in the near future, most of the textile units have set up their own power generating sets for producing power for captive consumption. With the increase in the price of FO and the levy of Central Excise duty (Basic Excise Duty at 14%), the cost of power generation through FO has substantially increased and become uneconomical.


It is therefore suggested that excise duty on FO should be reduced to 8%.



SALES TAX


To reduce CST to 1%



SERVICE TAX


To allow credit of service tax paid on erection and commissioning charges for wind mill as well as on the repairs and maintenance charges

Services rendered outside India to Indian tax entities such as export agent commission, exhibition charges and costs, hotel and travel costs, purchase of designs and publications overseas, laboratory testing charges abroad, transportation services abroad etc. should be exempted from service tax.


At present such matters are under litigation in several courts and there is an arbitrary use/abuse of power by inspectors when they examine balance sheets. All expenditure under foreign currency expenses is automatically treated as evasion, even though the services are rendered abroad. Their stance is that ultimately the services though rendered abroad are used by Indian entities. In fact, there is a strong logic to do away with service tax on all export based activities since anyway the government is committed to refund these taxes collected by way of export drawback.

 

INCOME TAX


Depreciation


To restore accelerated depreciation for windmills @ 80% under the Income Tax Act


This benefit has been now reduced to 15%.


Mandatory Cost Audit for Textile Mills


Textiles mills may be exempted from the mandatory cost audit as the details sought during the audit are available in the documents field under the Companies Act. Alternatively, the ceiling for compulsory tax audit requirement may be increased from turnover of 60 lacs to 10 crs. This will help small exporters save time and money on costly tax audit.



BANKING & FINANCE


To reduce the rate of interest on Rupee Export Credit to 7%


In a bid to improve transparency and uniformity in pricing of bank loans, the Reserve Bank of India (RBI) proposed linking lending rates to banks' cost of deposits through a "base rate system" that has replaced the benchmark prime lending rate (BPLR) system from April 1, 2010.


However the export credit rate as of now under "Base Rate" regime is much higher (11% to 15%) as compared to the exporters getting pre and post shipment credit under Prime Lending Rate (PLR) regime earlier. This is because banks have been freed to charge interest rate above the Base Rate". This is definitely an increase to the cost of finance affecting the margin of profit over and above the prevailing problem of Rupee Appreciation.

To extend Interest Rate Subvention of 3% to cotton textiles


Interest rate on export finance in India is linked to the Base Rate and is therefore very high as compared to our competitors. Exporters have a bear interest rate of over 14% as compared to our competitors who get export finance at a lower interest rate of 3 to 4%. In the case of cotton textile sector, banks normally provide working capital loan for 3 months stock of cotton and insist upon 25% margin money and the rate of interest charged is over 14%. This puts huge pressure on the working capital requirement of the cotton textile sector.


The government has extended Interest Rate Subvention of 3% on Rupee Export Credit to exporters from certain sectors to mitigate the high cost of export finance. However, cotton textiles exports have not been included under the scheme. It is suggested that the benefit of the Interest Rate Subvention should be extended to the entire cotton textiles sector.

 

However, if for some reason or due to budget constraints, if the scheme cannot be extended to the entire cotton textiles sector than at least it should be extended to made-ups (Home textiles). The annual supplement to the FTP 2009-14 had announced the inclusion of Chapter 63 under the scheme. However, the RBI circular issued subsequently to implement this announcement has included only certain HS codes.


The manufacturing process and costs involved are more or less same in the case of garments and home textiles. Ideally, garments and made-ups need to be treated at par as they fall under the same "Cut & Sew" categories of products. Since garments are included under the 3% Interest Rate Subvention Scheme, there is no reason as to why this benefit should be denied to home textiles. It is therefore suggested that cotton home textile items should be covered under the scheme.


However if the entire chapter 63 cannot be included, then it is proposed to include HS Code 6304 under the scheme. Further, if the product cannot be included at the 4-digit level then it is proposed to include the following items under the scheme:



POWER SECTOR


Considering the acute power shortage prevailing in the country, especially in Tamil Nadu, the following support may be provided to the textile sector:


To provide 25% capital subsidy for captive power plant including wind mill


To permit usage of super kerosene oil for power generation and exempt the same from all central levies. This fuel is highly economical for power generation on a small scale at factory level if the same is exempted from all fiscal levies.



STATE/LOCAL LEVIES


Refund state/local un-rebated levies/taxes/duties to exporters


There are a number of state/local levies/non-vatable duties, the incidence of which adds up to a considerable amount (the incidence in textile sector works out to around 4 to 6 percent of FOB value at present). However, the same is not being refunded to exporters at present through Duty Drawback or any other scheme. The total incidence of these duties/taxes being very high in textiles, the same is adding to the cost and making the products uncompetitive vis-a-vis China, Pakistan, Bangladesh and others.

 

In order to make export products more competitive, these levies should be neutralized to exporters through the Duty Drawback or any other scheme so that the "country exports its products but not taxes".



TUFS SCHEME


It is suggested that the TUFS should be extended during the blackout period from 29.6.2010 to 27.4.2011 when the scheme was suspended. This period may be considered in the old format. Since, it is likely that earmarked fund of Rs.1972 crores under the Restructured TUF Scheme for the year 2011-12 may not be fully utilized and there will be some slackness in the Technological Upgradation Programmes by the textile industry due to recessionary condition.



OTHER ISSUES


To include printed bags with zippers under the scheme of duty-free imports of specified items against export of cotton made-ups and to increase the entitlement rate from 1% to 3% of FOB value of exports


Sr. No. 284 of Customs Notification No.12/2012 dated March 17, 2012 as amended by Notification No. 21/2013 dated 18.4.2013 allows duty free imports of certain specified items like zipper, lace, etc against exports of cotton made-ups up to a value of 1% of the FOB value of exports in the preceding year. Exporters have represented for the inclusion of "printed bags with zippers" under the scheme. It is suggested to cover this product under the scheme.


Further, the rate of entitlement should also be increased from 1% to 3% as in the case of garments and made-ups should be treated on par with garments for the purpose of extending export benefits/entitlements.



Working Capital Raw-material


Textiles mills may be provided with working capital assistance for purchase of raw cotton at 7% interest rate, 10% margin money and 9 months credit period to create a level playing field and enable the industry to pay international price to the farmers.

 

To delink Status Holders Incentives Scrips (SHIS) from TUFS availment


Status holders are entitled to a Duty Credit Scrip @ 1% of FOB value of exports made during 2009-2010, 2010-2011, 2011-2012 & 2012-2013. However, these entitlement is subject to the condition that the status holder should not avail benefits under the TUF Scheme. In this regard, most of the textile units have availed the benefit under the TUF Scheme and therefore are ineligible to get these benefits. It is therefore proposed that the benefit of SHIS should be delinked with the condition of non-availment of benefits under the TUF Scheme which will enable the textile exporters to modernize their manufacturing units.




The author works as an Executive Director for MSUM India Ltd.