CapitalMarket.com - Ready Made Garments: Remove 10% Excise Duty on Branded Garments
Pre Budget 2012-13 Tuesday, March 06, 2012 20:31 Hrs IST
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PRE BUDGET REPORTS

Ready Made Garments: Remove 10% Excise Duty on Branded Garments

The Domestic Textile and Garment Industry is estimated at Rs. 1,50,000 crore which has grown at an annualized rate of 14% since 2007, providing Direct Employment to about 6 Million People. Majority of the Market is unorganized, characterized by Family run Businesses with small capacities and limited reach. Organized market constitutes only 25-27% of the domestic manufacturing sector, largely driven by the penetration of Organized Retail. High degree of growth is expected on account of rising disposable Incomes, growing Consumer class and advent of International Brands in the Indian Markets which would increase the level of consumption. The Domestic Market Size is expected to reach Rs. 3,00,000 crore by 2017 creating a Direct Employment opportunity to more than 7 Million People.

The Indian Apparel industry is export competitive, thanks to the lower production cost and abundant raw material base. Exports of textile industry have revived from a negative growth of 0.5% in FY08 to 17.7% in FY09, 3.7% in FY10 and 13.3% in FY11. According to the latest available statistics RMG (Ready Made Garments) exports grew 28% to Rs 342.70 billion and constituted 47.3% of the total textile exports in period April – October 11. Cotton RMG and accessories constituted 70.3% of the total RMG exports followed by 15.4% of MMF garments in period under review. On a broader time frame, share of RMG in total textile exports grew from 48.5% in FY04 to 54.6% in FY09 but has slipped from then to 47.1% in FY11. RMG has reported volatile behavior in the exports in line with the total textile exports. The RMG exports grew 29% in FY09 on the back of dip in the raw material prices and boost up of exports from Government. However, the growth remained muted with 1% and flat growth in FY10 and FY11.

India stands as third major supplier to EU (27) and US with share of 7.78% (Trailing China and Turkey) and at 5.96% (trailing China and Vietnam) in each of the respective country's imports. However, for India USA / Canada accounts major market for exports at 23.66% followed by EU (27) 23.55%, Africa Zone 10.34% and Bangladesh 9.32% etc.

On the flipside, for the export of cotton fabrics, Sri Lanka continued to be the leading market with a share of 14% followed by USA (10.36%) and Bangladesh (6.74%). Other leading markets are the UAE, Italy, Senegal, Turkey, Togo, UK and Sudan. USA continued to be the leading market with a share of 47% in the case of Cotton Made ups followed by Germany with (7.78%) and UK (7.57%). Other leading markets include UAE, France, Italy, and Australia.

Government has introduced several export promotion measures in the Union Budget 2011-12 as well as through schemes of Foreign Trade Policy 2009-14, including incentives under Focus Market Scheme and Focus Product Scheme; broad basing the coverage of Market Linked Focus Product Scheme for textile products and extension of Market Linked Focus Product Scheme etc. to increase the Indian share of exports in the global trade of textiles and clothing.

Garments industry has witnessed pressure on margins affecting profitability in FY10 and FY11, mainly on the back of cotton and yarn prices. Further, Industry has witnessed pressure on the profitability over the sharp spike in yarn prices in March 2011. Adding to the above, Government has also increased the excise duty of 10% on branded apparels in budget 2011/12 with Cenvat credit on inputs, input services etc. Post Budget, the Government has increased abatement from 40% to 55%. Thus the excise duty levy on branded readymade garments will be based on Retail Sale price, with abatement of 55%. This means, the excise duty will be levied at 10% on 45% of the retail sale price. Thus the industry has hit the bottom with blow of spike in the cotton prices and also 10% excise duty last year.

With a view to promote the Indian Textile and Garment Sector and provide impetus to promote exports, CMAI (Clothing Manufacturing Association of India) and Apparel Export Promotion Council (AEPC) put forward the following recommendations to the finance ministry for the consideration before upcoming Union Budget 2012/13.

Industry Recommendations:

  • Remove 10% Excise Duty on Branded Garments or reduced it to 1% level in line with 130 Other Items. Extend benefits of Section 35 (2AB) of the Income Tax Act (deduction of 150% of the expenditure incurred on In-house Research and Development Facility by any Company engaged in the business of Manufacture or Production of any Article or thing specified in the Eleventh Schedule).
  • Place manmade fibers in line with the cotton. Thus remove the customs duty for import of manmade fiber from 5% to 0%.
  • Permit zero percent duty on special machinery intended to manufacture synthetic garments and also processing of fibers. Also slash excise duty on MMF.
  • Increase duty drawback rate on Knitwear and garments by 3% from current 7.1%.
  • Extend TUFS to 12th five year plan also. Further 8% interest subsidy and 20% capital subsidy under TUFS should be extended for purchase of Special Machinery to manufacture synthetic garments and processing fabrics. Also give 8% capital subsidy at 50% for processing machinery including effluent treatment plants (ETP). Include Wind turbine generator under TUFS.
  • Extend 2% interest subvention on packing credits for another two years and extend the same to entire apparel exports.
  • Exclude RMG industry from Standard Weights and Measurement Act.
  • Enhance the depreciation rate on plant and machinery from the 15% to previous level of 25%. Or else, fix depreciation rate at 25% for at least Garment Sector.
  • Exempt service tax on ECGC Premium either through banks or directly for insurance of export cargo.
  • Encourage Indian brands in export markets through Financial and administrative contribution to develop into world class brands.
  • Provide 5% incentive under market linked focus product scheme for exports made to other than traditional markets. Also allocate Rs 10 billion under Market Development Fund so as to boost exports.
  • Waive TDS on Foreign Agency Commission. Also revise the threshold limit prescribed under various TDS provisions according to present inflationary trend.
  • Regulate second hand or worn clothing imports and curb illegal imports.
  • Permit FDI in multi brand retail.
  • Introduce GST. Till introduction of GST, compensation has to be given to the tune of 3% to the exporters against State Levies such as Octroi and other state taxes and transaction cost.
  • So as to increase the export competitiveness of knitwear export units, Increase the investment in plant and machinery of SME units from existing Rs 10 crore to Rs 25 crore.
  • Extend the credit rating facility to domestic manufacturers so as to avail loans at lower rate of interest etc and other benefits.
  • Establish a separate chapter for export sector in monetary policy and the export sector should be delinked with base rate. Thus Pre shipment and post shipment export credit in Indian Rupee has to be given at the Base Rate. Till a separate chapter for export is announced, the Bank credit rate given to exporters may be fixed at 7.5%.
  • Extend foreign currency credit to all exporting units so as to reduce credit cost.
  • Setup an ECB window for MSME export sector given the criticality of the existing global market to retain the competitive edge after making necessary amendments in the respective RBI Circulars.
  • Waive processing charges by banks for annual renewal of limits. Also reduce transaction cost to 1 bps (from 4 bps) on cross currency booking and Negotiation charges to 0.05% (from 0.15%) and booking charges on every forex booking from Rs 750 to Rs 250.
  • Sampling Costs be considered as part of R&D Expenses and allow for necessary deduction for the same. Extend the same above benefits to the other forms of Businesses such as Partnership Firm, Sole Proprietorship etc as well.
  • Conduct pan India anthropometric study for the industry so as to solve the problems of standard sizing of apparel products for addressing demand of all the sections of the industry. Establish a center of excellence or product innovation center for providing design and style intelligence and product development.
  • Establish Center for Excellence (with an investment of Rs 25 crore) so as to improve product portfolio and product innovation so as to boost market consumption. Also establish an institute so as to update the database of the industry and take initiatives to explore the region wise niche products to the whole country, which will help in brand building.
  • Allocate Rs 1500 crore for the formulation of Integrated Processing development plan as per 12th five year plan working group.

Analyst Expectations:

Textile Industry has witnessed fall the cotton prices in the cotton year (October –September) 2011/12. On an average, prices of leading variety of cotton – Shankar 6A fell by 40% from peak of Rs 16771 per Quintal in March 11 to Rs 10028 per Quintal in February 2012. With domestic consumption of 41:59 between MMF and Cotton, the raw material pressure for RMG players can ease on drop in cotton prices. Most of the branded apparel manufacturers have not yet passed on the advantage of dip in the raw material prices. So there are very sleek chances for cut in excise duty on branded RMG. On the other hand, with presentation of National Fiber policy, the Government may place fibers in line with the cotton.

Further according to industry estimates, textile industry requires Rs 188,000 crore of investment during FY10-20 so as to address the growing demand both domestically and internationally. Of the above Rs 112984 crore (around 63% of the total investments) were required in weaving, Knitting, Processing and Garmenting segments. Thus, extension of TUFS to 12th five year plan will be helpful for the capital intensive textile industry.

In January 2012, Government has permitted 100% FDI in single brand retail. This move is expected to provide stimulus to the domestic small and cottage industries and is particularly beneficial to the unorganized small processing and weaving and garmenting sector.

Companies to Watch:

Raymond, Aditya Birla Nuvo, Gokaldas Exports, House of Pearl Fashions, Page Industries, KPR mills etc.

Outlook:

From 2011, European Union relaxed norms whereby even if Bangladesh (and other Least Developed Countries) imports fabrics from other countries and produces Ready Made Garments, the latter will still enjoy duty and quota free exports for 100% of RMG exported by LDCs to European Union. Subsequently, India signed a Free Trade Agreement with Bangladesh, which also included textile products.

The twin effect of the above is that, we are witnessing spike in yarn and fabric exports from India to Bangladesh, and accelerated rise in RMG exports from Bangladesh to India. Bangladesh enjoys significantly lower labour costs compared to India.

Meanwhile, India has banned export of raw cotton in early March 2012. This is leading to restriction in availability, and spike in global cotton prices, which can trickle down to yarn prices too. On the otherhand, the domestic cotton prices can ease from current levels. This should benefit yarn producers, but a part of the benefit can trickle down to Ready Made Garment sector too, depending on the demand.

Indian Garment Industry is undergoing major changes to attract the export orders with product development, improving designs fabric innovation etc. Any boost to improve the export competitiveness for exports to other than EU and US will enhance the industry growth. Also, any interest subvention and extension of duty drawback will flourish competitiveness of the industry.

Others
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4  Pesticides and Agrochemicals: Cut Excise duty on Pesticides to 4%
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4  Oil drilling and Allied Services: Bestow infrastructure status & remove NCCD on crude oil
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4  Glass and Glass Products: Abolish customs duty on Soda Ash
4  Bank Fixed Deposits: Reduce Duration of Bank Tax Saving FDs to 3 Years
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4  Textile Machinery: Remove TUFS benefit for imported second-hand textile machinery
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4  Mutual Funds: Include ELSS as an eligible tax saving instrument under DTC
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4  Education: Increase budget allocation for education, and grant infrastructure Status
4  Hotels: Provide infrastructure status
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4  Telecom: Finalize 2G spectrum bidding process, clarify on the spectrum prices
4  Ready Made Garments: Remove 10% Excise Duty on Branded Garments
4  Dyes and pigments: Retain customs duty on dyestuffs at current levels
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4  Pharma: Remove anomaly of higher excise duty on APIs than formulations
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