The Central Sales Tax on the yarn is two per cent, while in Tamil Nadu, the Value Added Tax (VAT) is five per cent on cotton yarn. Further, fabric is exempted from VAT in TN. With the high VAT rate on cotton yarn, there is evasion of duty by several powerloom units. They bill the yarn as hank yarn or as fabric to avoid duty. The Tamil Nadu powerloom unit owners have appealed to the State Government to reduce VAT on cotton yarn to two percent.
M Duraisamy, Chairman, PDEXCIL, in a memorandum to the government said that States such as Maharashtra have two per cent VAT on cotton yarn. He said that many units purchase yarn from other States. The powerloom units need to pay high price for yarn because of the five per cent VAT. Hence, the Government should reduce the VAT on yarn to two per cent and if needed, levy one per cent VAT on fabric. The levy of one per cent VAT on fabrics by the State Government and reduction of the duty on yarn will bring down evasion and increase the revenue for the government. Duraisamy further said that most of the fabric exports from this region are to the Latin American and African countries which had declined because of withdrawal of some of the export incentives by the Central Government in April last year.