The Hindu Business Line : Sewing up the competition

DOING away with the mandatory Cenvat duty for the textiles sector, the Finance Minister has proposed an optional duty regime to enable the sector face global competition following the dismantling of the Multi-Fibre Agreement (MFA) this year-end.

Under the radical duty structure announced in the Budget, every manufacturer — whether from the handloom, powerloom or composite mill sector — has been allowed to choose between a complete exemption from payment of excise duty or adopting the Cenvat route, under which manufacturers would be eligible for Cenvat credit.

The only exception being manufacturers of manmade fibres and filament yarns, including textured yarn, who would still come under the mandatory Cenvat scheme.

Under the exemption route, no duty needs to be paid at any stage of the manufacturing process. If the manufacturer chooses the Cenvat route, then he can claim credit for all duties paid at the earlier stages in the manufacturing process.

For those opting to pay the duty, the excise duty rates applicable would be 4 per cent for textile goods made from pure cotton and 8 per cent for all others. This is in contrast to the 12 per cent excise duty applicable now.

With the Rs 70,000-crore textile industry predominantly consisting of manufacturers dealing in cotton and other natural fibres, yarn, fabric and garments, the option route would be available to over 90 per cent of the industry, according to analysts.

According to the KSA TechnoPak Chairman, Mr Arvind Singhal, the issue of a level-playing field between the handloom/powerloom sectors and the composite mills sectors has more or less been sorted out in the provisions announced.

Terming the announcement a "balanced move," the SRF Ltd Vice-Chairman and Senior Managing Dierctor, Mr Arun Bharat Ram, said that by introducing an element of choice of taxation for the sector, the government has tackled both its political needs and taken care of fiscal responsibility concerns.

The Finance Minister has also reduced customs duty on specified textile- and garment-producing machinery from 20 per cent to 5 per cent. Customs duty on machinery for the silk textile industry has also been halved to 5 per cent.

Both the steps, according to industry players, would help manufacturers in their ability to revamp outdated machinery, widely used at present, to remain competitive in the post-MFA scenario.

Analysis

THE Budget proposals for the textile industry will have a positive impact on the industry on the whole. The decision to make the Cenvat scheme optional creates a level-playing field even as it accedes to the request of the powerloom and handloom sectors.

The decision has given a fillip to the garment industry. The question that now arises is who would actually opt for the Cenvat scheme as against availing themselves of the duty exemption.

While many would clearly like to benefit from the exemptions, some garment exporters, such as those in Tirupur, would perhaps be inclined to opt for the Cenvat system as they would have to show proof of payment of excise duty in order to make a claim under the duty draw back scheme.

Among those who do opt for the Cenvat system, exporters of cotton garments stand to gain due to the reduction of excise duty on pure cotton textile products from 12 per cent to 4 per cent.

Garment exporters would now be able to pass on this reduction in duty to the prices of their final product, making them more competitive. Companies such as Indian Rayon (Madura Garments), Arvind Mills and Zodiac Clothing would stand to gain.

The exemption from Additional Excise Duty for textiles and textile articles is an additional incentive to the industry.

An indirect measure that would give a fillip to the textile industry is the reduction in customs duty on textile and garment making machinery from 20 per cent to 5 per cent.

This would be positive for companies who are in the process of expanding and modernising their facilities, such as Arvind Mills and Raymond.

The downside is that the excise duty on polyester filament yarn and manmade staple fibre remains at 24 per cent and 16 per cent, respectively.

This, coupled with the increase in excise duty on synthetic and artificial filament yarns, would affect the synthetic industry. Companies such as Indo Rama Synthetics, Indian Rayon (Viscose staple fibre) and Vardhman Acrylic are among those who continue to be affected by the bias towards the synthetic industry.

Shanthi Venkataraman