India’s Denim Mills Cry the Blues Over Duty Drawback Cuts

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India’s denim sector is weighing in on the controversy that followed the government’s cutting of drawback duties for exporters, joining the industry call for remedy.

Led by the New Delhi-based Denim Manufacturers Association (DMA), the country’s denim manufacturers have requested the government offer increased support to counter the increased costs and potential loss of business.

DMA chairman Sharad Jaipuria said since the introduction of the Goods & Services Tax on July 1, which added to the price of goods sold before the Oct. 1 slashing of drawback duties, the denim industry has temporarily closed down roughly 30 percent to 40 percent of production, and is operating at 60 percent to 70 percent capacity thanks to a slowdown in demand and over-capacity in the industry.

“Presently, the industry is bleeding and if the situation continues, there can be more production cuts,” Jaipuria said.

India’s move to slash duty drawback rates created deep consternation among exporters that had relied on the funding to keep prices at bay and maintain competitiveness with its Asian manufacturing neighbors.

[Read more about India’s drawback duty cuts: Importer Beware: FOB Prices Out of India Spike 5 Percent]

Deepika Rana, president of strategic initiatives at Li & Fung with responsibility for the Indian Subcontinent, said in an interview that exporters see the drawback as a rebate, and figure their costing with that in mind, which, she said, is “probably not the most effective thing to do.”

A drawback, officially, 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. When the duty drawback move was announced, Indian manufacturers claimed the cut would lead exporters to raise prices to balance the loss of revenue from the refund.

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 designed to make the industry more competitive.

The Apparel Export Promotion Council 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 more than 12 million people.

The new rate 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 is now 2.5% compared to the previous 9.5%, and the rate on garments made of man-made fibers is also 2.5% compared to 9.8% before.

The rates were lowered in 2016 as a boost to the apparel and textile industry, but the government decided to end the incentive program. Some experts suggested the move might have also been made to comply with World Trade Organization regulations on export subsidies.

Li & Fung’s Rana said, from the government perspective, the drawback program was essentially a refund of a group of taxes levied on the industry.

“Now with all the taxes rolled into [the new regime of Goods & Services Tax], the government has withdrawn the refund because they had already given the exporters a provision that the GST could be claimed back,” Rana said. “So, the government is saying that if we are allowing you to claim back the GST under Make in India, then why should we give you the additional refund under the drawback program begun last year?”

Make in India is a government initiative launched in 2014 to encourage national and multi-national companies to manufacture their products in India.

But there still is a gap between the rescinded drawback and the rollback of the goods and services tax of about 5 percent, which is what is causing the consternation among manufacturers and could lead to a comparable increase in FOB prices, she noted.

The apparel industry in India has continued to lobby the government for relief and has been able to obtain some help from the Goods & Service Tax Council, since GST is an indirect tax levied on the supply of goods and services within the country, allowing the government more flexibility in policy.

These measures include a reduction in the rate of GST on man-made items such as synthetic filament yarn, nylon, polyester and acrylic to 12 percent from 18 percent.

“The council is confident that these measures would provide immediate relief to the export sector and enhance export competitiveness of India,” the Ministry of Finance said earlier this month. “The council also decided to continue to monitor the situation closely so that going forward all required support continues to be extended to this important sector.”

DMA said this week that the denim fabric manufacturing industry is under stress and government support is needed. There are 46 denim fabric mills operating in India today, with a production capacity of 1.5 billion meters.

As part of their plea for a shift or reversal in the drawback rates, mill executives are calling for extensions of government export marketing programs.

Discussing the overall apparel export situation, Li & Fung’s Rana said, “I don’t see it as so dire, I see it as a correction. The first light at the end of the tunnel is that there is an ongoing conversation with the government. So, these numbers are not set in stone.”

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