VAT on Textiles

So a day long bandh has been observed by Textile Business Sector in the State of Assam. As per media, the bandh was a grand success. I may be allowed to discuss the back ground of this huge protest.

The Government of Assam has levied tax (VAT)  @ 5% on sales/ purchases of ‘Textiles fabric including textile made-ups i.e. fabric that has undergone  a stitching process’ w.e.f. 28/06/2012 vide  Notification No. FTX.55/2005/Pt-V/255 dated 28^th June 2012. The readers may be aware that the textiles has been brought under the ambit of the Assam Entry Tax Act, 2008 and currently 2% Entry tax is leviable on import (bringing from out-side the local area) of textiles. It is worth to be noted that under Entry tax Act, there is no system of adjusting the entry tax on raw materials against the VAT liability of the finished products.

This may be a mystery for the common man that why the textiles fabrics (unstitched) were tax exempted before the said date and what was the reason that the Government of Assam, which do not mind to levy tax on petrol @ 27.5% had not levied any VAT on this commodity. Let me take an attempt to demystify the issue.

The textiles along with some other commodities were subject matter of  “the Additional Duties of Excise (Goods of Special Importance) Act, 1957” (popularly known as AED-GSI) for levying of additional duties of excise. The commodities covered under this AED-GSI are listed in the First Schedule to the Act. The States were entitled for getting their shares against the collection of such duties. However, such entitlement was subject to a restriction that the States which levy a tax on the sale or purchase of these commodities after the 1st April, 1958 shall not participate in the distribution of the net proceeds. It is thus apparent that the additional duty of excise (AED-GSI) was actually in lieu of Sales tax. As per my little knowledge, this may be an important reason for keeping the textiles in Schedule 1 of the Assam Value Added Tax Act, 2003.

The Central Government had however exempted the goods under First Schedule of vide Central Excise Notification dated 01.03.2006. Thus fabric enjoyed exemption from both the excise duty and sales tax. When this exemption was introduced it was widely perceived that the levy of sales tax on fabric was just a matter of time. But that was not to be. While the rate of AED-GSI was reduced to 0%, the taxable items continued to remain to be listed in the said First Schedule. The state governments were thus prevented from levying sales tax on Fabric because this product enjoyed the protection of being listed in the First Schedule to the AED-GSI Act 1957, though the rate of tax was 0%.

The situation changed, when the Central Government vide Finance Bill 2011 had removed the textiles from the First Schedule of the AED-GSI Act 1957. So as soon as Finance Act was passed, the State legislatures were become free to impose sales tax on textiles.

As it has been heard that VAT on textiles have been introduced in some other States also, such as Andhra Pradesh, Maharashtra, Punjab etc. In all the States the Textiles sector has vehemently opposed the imposition of VAT.  It has been heard that Chief Minister of Goa, had announced that his Government is going to remove VAT on fabrics.