The uniform 12 per cent GST rate on man-made fibre (MMF), yarn, fabrics and apparel will reduce compliance burden for the industry and help the sector emerge as a big employment generator, the textiles ministry said on Monday.

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The Central Board of Indirect Taxes and Customs (CBIC), under Ministry of Finance, on November 18 notified 12 per cent GST rate for MMF, MMF yarn and MMF fabrics which will come into effect from January 1, 2022.

Currently, tax rate on MMF, MMF yarn and MMF fabrics is 18 per cent, 12 per cent and 5 per cent, respectively. The taxation of inputs at higher rates than finished products created build up of credits and cascading costs.

It further led to accumulation of taxes at various stages of MMF value chain and blockage of crucial working capital for the industry. Uniform GST rate on MMF, MMF yarn, MMF fabrics and apparel has addressed the inverted tax structure in the MMF textile value chain.

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This will help the MMF segment grow and emerge as a big job provider in the country, the ministry said in a statement.

The Textiles & Apparel (T&A) industry was having long pending (first under sales tax then, under VAT and finally under GST regime) demand for removal of inverted tax structure on MMF value chain.

Though there is a provision in GST law to claim the unutilised Input Tax Credit (ITC) as a refund, there were other complications and resulted in more compliance burden. The inverted tax structure caused effective increase in rate of taxation of the sector. The world textiles trade has been moving towards MMF but India was not able to take advantage of the trend as its MMF segment was throttled by inverted tax regime, the statement said.

"The significant portion of MMF products (output) is expected to be exported, it will lend a better scope for encashing the unutilised ITC. Also since tax on input will get refunded, on output (export) which will be zero rated, it would not add to cost and make exports competitive," the statement added.

Also an uniform 12 per cent GST will help the industry having huge portion of piled up opening ITC by enabling them to encash the same progressively, the ministry said.

"Differential rates for garments create problems in compliance with the tax regime. MMF garments cannot be identified easily and cannot be taxed differently, hence there is need for uniform rate," it added.