GST 2.0 for structural reforms in Textile sector
The textile sector has been significantly boosted by changes relating to refund of capital goods for exports and inverted tax structure, as also of input services. Further, ITC for employee related expenses including insurance, outdoor catering will benefit the credit chain. Some of the aspects impacting the textile sector are discussed below:
Refunds for capital goods for exporters and input services for inverted tax structure – significant boost in working capital:
In a significant relief for exporters, refund for capital goods will now be available over a period of 5 years, starting from April 2027. This will significantly improve working capital cash flow and unlock blocked capital of textile companies, allowing them more freedom to spend on further expansions and use cash for general business purposes.
Similarly, refund of capital goods and input services for inverted tax structure will help achieve the same purpose.
The capping of maximum turnover of zero-rated supply of goods at 1.5 times the value of like goods domestically supplied, applicable for LUT u/r 89(4), is proposed to be removed, bringing relief for the sector. However, the aspect of refund being granted based on FOB valuation continues for such exporters.
Unblocking of ITC, significantly in the context of employee related expenses:
The GST Council has announced rationalization of blocked credit by amending Section 17(5) of the CGST Act and will be implemented in a staggered manner.
The proposed amendments unlock the blocked ITC, the reform will improve working capital liquidity, free up capital for expansion and fresh investment, and strengthen the competitiveness of the sector. The council proposes to allow ITC in relation to business-related expenses, allowing input tax credit to flow seamlessly through the supply chain without leakage or distortion. The proposed amendments rationalize/ unblock ITC in relation to the following:
group health and life insurance for employees;
outdoor catering;
goods destroyed, written off after expiry of shelf life;
free samples;
telecommunication towers, pipelines laid outside factory premises.
However, the above announcement does not clarify the GST position involving recovery from employees. Challenges in relation to specific rate notification like catering continues, ITC eligibility related to the goods used and destroyed during the manufacturing process, and eligibility to avail ITC qua promotional items.
Separate committee shall examine implementation of ITC for bona fide purchases from non-existent suppliers / tax paid availing fraudulent ITC in terms of section 16(2)(c) of the CGST Act.
Permanent transfer of Intellectual Property Rights as services:
Temporary transfer of intellectual property rights qualified as supply of services. However, there was lack of clarity with regard to permanent transfer of IP rights, as to whether which would otherwise qualify as goods. Earlier, there was ambiguity with respect to both exports and imports as well as local supplies (whether IGST or CGST+SGST is payable), since intangibles do not require any physical movement.
The amendment in Schedule II to classify it as supply of services brings clarity for domestic supplies and import and export alike.
Having said that, for transactions between related parties, the valuation aspect will still play an important role for determining the tax liability.
Zero rated benefit for non-physical export:
Goods delivered at FTWZ: Zero rated benefit proposed for supplies made by Indian manufacturers to overseas customers where the goods are delivered to a Free Trade Warehousing Zone (FTWZ) for warehousing or further processing. This will help the companies for procuring from India as per Defence oiff set contract and make it India localization requirements.
We need to see the fine print as certain aspects remain open, including documentation requirements, procedures for goods entering FTWZs, and the related GST/customs compliance obligations.
Faceless assessment and arrest:
In line with the GST Council’s resolution to facilitate ease of doing business and strengthening ‘trust-based tax regime’, arrest powers under Section 69 of the CGST Act have been completely withdrawn removing a very draconian measure and providing considerable relief to taxpayers being subject to investigation and scrutiny. Further, provisions in relation to prosecution and issuance of show cause notice have been rationalized, adding various fetters on initiation of proceedings and imposition of penalties. punitive measures like arrest during investigation which is also in line with the direction of various High Courts.
However, it is to be noted that only the monetary threshold has been increased for institution of prosecution and certain concessions have been made in relation to offences. Thus, punitive measures such as penalty and imprisonment for offences enlisted would continue with respect to serious cases of fraud and evasion of tax, under Section 132 of the CGST Act . The Central Government has introduced faceless assessment similar to Income tax and Customs for taxpayers under central jurisdiction.
Significant automation reforms:
It is proposed to significantly reform the processes relating to return mismatch, including credit note matching and acceptance, IMS, providing legal backing to electronic credit and reversal and RCM statements, provide for automatic amendment and cancellation of registration as also faster refunds, clarifications relating to interest on pre-deposit and ISD. This is a significant structural reform, aimed at reducing taxpayer interaction with GST officials and moving towards automation driven systems. While some of the changes will be implemented on staggered basis, it enforces confidence for businesses towards achieving the objective of making GST a good and simple tax.
Bunching of SCNs to be validated:
Bunching of SCNs for multiple financial years is sought to be taken care by amending the provisions. This may put to rest the litigation in relation to technical point of bunching, wherein Courts have so far offered differing views on its validity.
Note: The above update is based on PIB Release and announcements made post Council meeting. The same is subject to appropriate amendments / notification to be implemented in due course.
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