In recent months, the Central Goods and Services Tax (CGST) department has launched investigations into over two dozen textile manufacturing units across India. The GST department has recently intensified its scrutiny of textile manufacturers, specifically targeting the misclassification of services to reduce tax liability. Officials have observed that some manufacturers are intentionally categorising activities that significantly change fabric composition as mere job work services.
Under GST regulations:
- Washing and dyeing services are classified as job work and attract a 5% GST
- Transformative processes such as bleaching, printing, and chemical treatments, which alter the fabric’s essential properties, fall under a different category and are taxed at 18% GST.
CGST officials believe that many textile units, ranging from large corporate firms to small and medium enterprises (SMEs), are deliberately misinterpreting these classifications to benefit from the lower tax rate. Such actions, if proven, could result in backdated tax payments, penalties, and legal repercussions for the companies involved.
GST Revenue Loss and Government’s Concern
The misclassification of textile processing services has resulted in significant revenue losses for the government. Officials estimate that the shortfall in tax payments runs into hundreds of crores, making it a serious issue for the authorities.
An official from the CGST department stated, “Textile manufacturers are knowingly misclassifying their services and paying 5% GST when they should be paying 18%. Investigations are ongoing across multiple states, and necessary actions will be taken against those found guilty.”
The authorities have already identified several units engaged in these practices and are expected to issue notices to recover unpaid taxes. In addition, tax authorities are considering stricter regulations to prevent further revenue leakages.
Industry Experts Weigh In on the GST Ambiguity
Tax experts argue that the ongoing misclassification issue stems from a lack of clarity in GST slab definitions and inconsistent enforcement.
“The problem arises due to multiple GST rates and a lack of clear definitions for textile processing activities. Some manufacturers have exploited this ambiguity to classify transformative processes under the 5% tax bracket, leading to significant revenue losses for the government.” – Sivakumar Ramjee, Executive Director at Nangia Andersen explained to a leading news portal.
Krishan Arora, Partner at Grant Thornton Bharat, echoed similar concerns in a news portal, stating, “This appears to be a case of misinterpretation, with the tax department’s stance contradicting the original legislative intent of GST. A definitive resolution is essential to provide clarity to the textile industry and prevent further disputes.”
GST Council’s Past Deliberations on the Issue
Since its introduction in 2017, the Goods and Services Tax (GST) regime has had a significant impact on India’s textile industry. Processing activities like dyeing, bleaching, and printing have been crucial points of contention.
The government has long argued that processes fundamentally altering the nature of fabrics should be taxed at 18% to ensure fair taxation and prevent misuse. During the 45th GST Council Meeting, held in 2021, there was a proposal to increase the GST rate on dyeing and printing services from 5% to 12%. However, due to resistance from industry stakeholders, this proposal was eventually dismissed.
Industry representatives contended that an increase in tax rates would burden textile units, particularly SMEs, and disrupt business operations. Many textile manufacturers have already been facing challenges such as rising raw material costs, supply chain disruptions, and competition from international markets. Thus, any sudden tax hike could lead to further financial strain.
The Road Ahead: Possible Solutions and Regulatory Measures
Given the ongoing investigations and growing concerns about revenue losses, the government is likely to implement stricter compliance measures. Potential steps include:
- Clearer Guidelines: The GST Council may issue detailed guidelines to differentiate between job work services (5% GST) and transformative processes (18% GST) to prevent future misinterpretations
- Stronger Enforcement: More frequent audits and inspections of textile processing units to ensure correct tax classification
- Possible Tax Rate Revisions: Reconsideration of the tax rate for certain textile services to strike a balance between industry viability and government revenue.
- Industry Consultations: Engaging with industry stakeholders to address concerns and provide a transparent framework for tax compliance.
Conclusion
The textile industry’s alleged misclassification of services under GST has raised serious concerns for tax authorities, leading to widespread investigations. While the government seeks to recover lost revenue, the industry continues to grapple with unclear tax structures and multiple GST rates. Moving forward, a clear regulatory framework and stringent enforcement mechanisms will be necessary to ensure fair taxation while supporting the growth of India’s textile sector. Industry experts and stakeholders must work collaboratively with the government to achieve a solution that upholds both compliance and economic sustainability. For more clarity get in touch with GST experts today from Vakilsearch and stay compliant.
