India’s Duty Drawback Rate Drop Could Mean Higher Prices for Sourcing There

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Pratibha Syntex fabric mill in India. Fabric mills were added to the BCI traceability system in 2015.
Pratibha Syntex fabric mill in India. Fabric mills were added to the BCI traceability system in 2015.

The India government has slashed duty drawback rates effective starting Oct. 1, drawing the ire of apparel exporters.

Drawback is the refund of certain duties, internal revenue taxes and certain fees collected upon the importation of goods when goods are then used for export. The cut back of the drawback rates result would likely lead exporters to raise prices to balance the loss of revenue from the refund. The rates were lowered in 2016 as a boost to the apparel and textile industry, but the government decided to end the incentive program.

The new All Industry Rates (AIR) for cotton garments was dropped to 2 percent from 7.7%, while the duty drawback rate on garments containing cotton and man-made fiber blends will be 2.5% compared to the existing 9.5% and the rate on garments made of man-made fibers will also be 2.50% compared to 9.8% currently.

Clothing items made of silk will be subject to a rate of 4.8% compared to the earlier 7.6%, while the rate on wool apparel will also come down to 3.5% from 8.7%.

“The apparel industry needs to book orders in advance for the next season,” said Ashok G. Rajani, chairman of the Apparel Export Promotion Council. “I think the present new rates are unacceptable and the ministry of textiles should immediately consider AEPC’s recommendation for extending the current transition rates till March 31, 2018, to instill confidence in the sector and…for sustaining employment in the sector. In the absence of an encouraging drawback rates, the exports will further witness a sharp decline just ahead of the peak festival season when the industry was expecting recovery.”

[Read more about Indian textiles: Indian Spinners Advised to Reduce Yarn Production for Market Stability]

The lower rate comes at a time when the industry is facing a decline in exports due to global conditions and currency overvaluation. The duty drawback was one of the key policy support measures for making the industry more competitive.

AEPC said the steep drop in the drawback support will negatively impact about 7,000 small and medium enterprises in the apparel export sector, creating an adverse effect on the employment being provided to over 12 million people.

AEPC has been in constant consultation with the Drawback Committee was expecting continuation of the present drawback rates until such time as talks could be completed and proper measures taken to ensure that exports remain zero rated and no taxes are exported.

The Tiruppur Exporters Association also termed the reduction in duty drawback rate as death knell for the region’s garment export sector. TEA president Raja M Shanmugham said once buyers go out of the country due to higher prices, it will be difficult to bring them back.

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