Textile units face GST scrutiny over service misclassification
The CGST department has observed that several manufacturers have recorded processes involving significant alterations to fabric as mere ‘washing and dyeing’ to benefit from a lower tax rate.
In recent months, the Central Goods and Services Tax (CGST) department has conducted investigations into more than two dozen textile manufacturing companies across India for misclassifying textile processing activities to reduce tax liabilities.
The CGST department has observed that several manufacturers have recorded processes involving significant alterations to fabric as mere ‘washing and dyeing’ to benefit from a lower tax rate. Under the Goods and Services Tax (GST) framework, washing and dyeing fall under ‘job work services’ in the textile sector and are taxed at 5 per cent. However, processes that substantially modify the fabric, such as bleaching, printing, or treatments altering its essential characteristics, attract a higher GST rate of 18 per cent.
Authorities believe that many textile units, including large corporations as well as small and medium enterprises, have deliberately classified transformative processes under the lower tax bracket, leading to significant revenue losses for the government. The estimated tax shortfall is reported to be in the hundreds of crores.
Tax experts indicate that this misclassification stems from ambiguity in GST rates and unclear definitions of taxable textile processes. The presence of multiple tax slabs has created confusion, potentially allowing manufacturers to exploit the system. The issue has highlighted the need for greater regulatory clarity to ensure accurate classification and compliance across the industry.
Since the implementation of GST in 2017, the textile industry has undergone considerable changes, with job work services playing a crucial role. Disputes regarding the classification of textile processing activities, particularly in dyeing and printing, have been on-going. During the 45th GST Council meeting, a proposal to increase the tax rate on these services from 5 per cent to 12 per cent was considered but ultimately rejected. Despite this, the misclassification issue persists, prompting continued scrutiny from tax authorities.
News source: Financial Express
