46th Meeting of the GST Council, Lucknow

Minutes of the 46^th Meeting of the GST Council held on 31 ^st December. 2021 The 46th Meeting of the GST Council (hereinafter referred to as ‘Council’) was held on 31st December, 2021 at New Delhi under the Chairpersonship of Hon’ble Union Finance Minister, Smt. Nirmala Sitharaman (hereinafter referred to as ‘Chairperson’). A list of the Hon ‘ble Members/Ministers of the Council who attended the meeting is at Annexure-I. A list of officers of the Centre, the States, the GST Council, the Goods and Services Tax Network (GSTN) who attended the meeting, is at Annexure-2. The Chairperson invited the Revenue Secretary and the ex-officio Secretary to the Council (hereinafter referred to as ‘Secretary’) to begin the proceedings. The Secretary welcomed the Hon ‘ble Deputy CMS and Hon’ble Ministers to the 46^th meeting of the Council. He welcomed the Union Finance minister, Ministers/Members from the States, officers of the State Government and Central Government to the 46^th meeting of the Council at Delhi and emphasized the significance of the meeting as it had been called under the emergency clause under proviso to sub-clause (2) of clause 3 of the Procedure and Conduct of Business Regulations of the GST Council in which 48 hours of notice had been given.At the outset, the Secretary placed on record the gratitude and sincere appreciation for the valuable contribution made to the Council by Shri. Nitinbhai Patel, former Member from the State of Gujarat. On behalfofthe Chairperson and all the Members ofCouncil, he welcomed Shri. Kanubhai Desai, the new Member from the State of Gujarat, who attended the meeting of the Council for the first time. He also introduced and welcomed Shri Vivek Johri, the newly appointed Chairman, CBIC.He informed that a letter had been received from the Minister of Gujarat requesting that the proposed GST rate revision oftextiles from 5% to 12 % w.e.f I . I .2022 may be deferred. As this power lies with the GST Council, a meeting of the Council had to be convened. The said letter from Gujarat was received on 29.12 2021 and the notice for the emergency meeting was issued the same day for the Council meeting. He reiterated the discussions from the meeting of the Council elucidating the reasons for inverted rate correction in textiles in pursuance of which the decision for rate revision in textiles was taken in the 45^th meeting ofthe Council. 5 He informed the Council that in pre-GST regime, fabrics suffered a much higher incidence of tax. In the pre-GST regime, while cotton fabric had about 9% tax incidence, the MMF fabrics had about 13.6% tax incidence as compared to the existing 5% rate ofGST.

The Council had prescribed the restriction of not allowing refund of accumulated ITC. After the rollout of GST, the textile industry represented that the rate structure resulted in acute inversion in textile sector particularly at fabric stage. It was also argued that the restriction ofnot allowing refund of accumulated ITC on fabrics favored large composite mills while standalone Power Loom suffered. Accordingly, in stages, further relief was extended to textile sector. To begin with, GST rate on man-made yarn was reduced to 12 percent. Thereafter, refund of accumulated ITC was allowed on fabrics with prospective effect from 01.08.2018 and tax rate on job work services was also brought down to 5%. However, yarn continued to suffer significant inversion as value addition from fiber to yarn was not significant. Hence, standalone spinning units suffered. Fabric continued to have inversion on account ofhighertax rate on yarn, input services and capital goods. The adverse impact of inverted rate structure had bearing on ready-made garments segment on account of accumulated ITC on services and capital goods, Also, the cost associated with inversion in fabric became a cost that was transferred by fabric manufacturers to the ready-made garments. On readymade garments, the pre-GST incidence was about 13.2% as compared to 5% rate in GST. Lower rate of 5% and job work had led to hardships to dyeing units as inputs like chemicals and dyes attracted GST at the rate of 18% and effluent treatment attracted GST at  the rate of 12%. Job workers had been seeking correction in inverted duty structure even if it required increasing the rate of tax on dyeing services. The Ministry of Textiles had recommended for correcting inverted rate structure so as to unshackle it from the burden of taxes and to substantially increase employment opportunities in the textile industry. The differential rates and slow refunds of accumulated Input Tax Credit had affected the competitiveness of the industry and had proven to be a deterrent for investment in this sector. The Ministry of Textiles was of the view that for tax uniformity across the value chain, Man-Made Fibres (MMF) and yarns needed to be brought under a uniform tax slab to take care of inversion in the tax structure. This would benefit the spinning and power-loom sectors, which in turn, would create huge job opportunities. An interministerial group consisting of Ministry of Textiles, Ministry of Commerce and NITI Aayog had also made similar observations. The inter-ministerial group had observed that with implied limitation on growing cotton, man-made fibre base needed to grow at least five times in the next five years. The inversion in tax structure of textile sector had led to a refund of about Rs 4000 crores which was anticipated to grow considerably in future. The Fitment Committee had deliberated in detail on this issue and the impact of any calibration of GST rates and fabrics or garments on the end consumers. It was observed that the

Council had recommended a lower rate of 5% on all fabrics, and lower segment garments on account of acceptability of GST rate and essential consumption nature of the item. However, the experience since the rollout of GST had been that inverted rate structure had led to significant adverse impact as stated above. It had not really benefitted the consumer by way of reduction in prices of fabrics or garments. Inversion of tax rate meant that cost on account of accumulated ITC on services and capital goods and resource cost for seeking refund of accumulated ITC on inputs got embedded in the cost of fabric and garments. This could be 4% to 5% considering services and capital goods would at least constitute of 20% to 25% of the input cost. Further, removal of inversion would give a boost to the garment sector and with increasing production, the customer also would benefit. Therefore, increase in tax rates could, at the most, have a marginal effect on garments. Besides, as argued by Ministry of Textiles, there existed a strong economic justification that revised rate structure would help the sector grow at a faster pace. In this background, the Fitment Committee discussed the possible solutions to address the issue of inversion in the textile value chain. While doing so, it was kept in mind that input chemicals, capital goods and input services other than job work and inputs like buttons, dyes etc. were at 18 percent and hence low rate of 5% on MMF fabrics and garments would not help the sector. It was felt that at the garments or fabrics stage, it was not feasible to differentiate between the natural fibre and MMFs. In any case, blended fabric was quite common. Therefore, Fitment Committee was of the view that the output tax rate on fabrics and garments should be prescribed at a uniform level of 12%. It was also discussed that as per the recommendations made by the Ministry of Textiles and Inter-Ministerial Group (IMG), the GST rate on fibres should be lowered to 12% to bring them at par with yarn to avoid inverted rate structure at yarn stage. As the value addition at the fibre stage was significant and the import parity price for fibre was about hundred rupees per kg, the fibre manufacturer would not suffer adversely on account of inversion.The Secretary stated that the objective of a ve discussion was to show that the Council and the Fitment Committee had duly deliberated on the issues that arose in the textile sector in the past and had made the recommendatio s after due consideration. With the permission of the chair, he requested the Hon’ble Mem er from Gujarat to introduce the issue.

Hon’ble Member from Gujarat stated that ovid had impacted GST revenues, adversely affecting the State’s financial situation. Also, the GST compensation amount would

not be available to the States after June, 2022. The GST compensation had helped States to manage their financial situation much better despite strained finances due to Covid. During the last Council meeting at Lucknow, a few important decisions were taken keeping in view the twin issues of GST compensation and low GST collection. Two Group of Ministers (GoMs) were set up for rationalization of rates and restructuring of GST framework, suggesting procedural reforms, improving tax administration and preventing tax evasion. He requested to ensure that the recommendations of the GOM be submitted at the earliest and the decisions should be taken based on their recommendations to lay a clear roadmap for GST in forthcoming days.