The air is thick with the news of an impending levy of excise duty on readymade garments. The readymade garment industry is largely conventrated as cottage industry with three to five sewing machines set up in the homes of tailors. An organised sector of this industry also exists but is barely five per cent of the total number of garment units in India. Even the organised sector relies on the unorganised sector of jobbers, which is spread along the length and breadth of the country, to the extent of almost 25 per cent of its production needs.The garment industry sustains yet other unorganised sectors of the economy whose products are used in the manufacture of garments. These cover manufacturers of various types of buttons in different shapes and sizes made out of plastic or wood or metal as well as manufacturers of zip fasteners, snap fasteners, hooks, cardboard supports, collar stays, stainless steel pins, plastic sheets, cardboard boxes and sewing thread. This industry also supports a number ofancillary units carrying out beeding or embroidery work, fashioning of the fabric into accessories like neckties, cravats, shawls, scarves, dupattas and stoles as well as manufacturers and processors of fabrics in the handloom, powerloom and organised mill sectors. All put together the garment industry offers a means of sustenance to around 30 lakh workers, and consumes about 9,000 million square meters of fabric annually which is almost 30 per cent of the production of fabrics in the country. The industry thus carries out a social objective of providing employment and a means of sustenance to a large section of workers, besides clothing the nation. The garment industry is a major foreign exchange earner of the country earning a foreign exchange equivalent of almost Rs 15,000 crore annually for the country. Contributions towards this earning of foreign exchange are by both the organised and unorganised sectors of this industry.
In fact, this industry is the largest net foreign exchange earner of thecountry with a foreign exchange out go barely 15 per cent of the foreign exchange earnings of the industry. As compared to the total production of garments by the industry, exports constitute about 24 per cent by volume. The garment industry has two distinct sectors, the knitted sector that is hosiery garments which includes socks, stockings, cardigans, jerseys, T-shirts, and out of sight garments, and the woven sector consisting of mainly outerwear garments for ladies wear menswear and children wear. Accessories complete the wardrobe; these include cravats, ties, belts, caps, hats dupattas, stoles and shawls. The knitted sector can be further subdivided into fully-fashioned knitted garments on the machine, or garment manufactured by cutting and stitching from knitted fabric in the piece.
Levy of excise duty on any industry is principally from the revenue angle Insofar as the textile industry is concerned, the structure of the excise duty levy has varied from specific to ad-valorem to Modvat with theobjective of offsetting the cumulative effect of the levy on the price of the fabric. Historically, the levy has been only on the organised sector of the textile industry leaving out of its fold entirely the unorganised sector on the ground of employment potential and administrative difficulties in enforcing the levy.
Even in the case of the organised sector, apart from posting excise inspectors in every unit, supervised overall by an officer in charge of a certain range into which excisable units were classified, the procedure involved in the filing of various forms was so cumbersome that it led to avoidable disputes and straight forward or disguised corruption. The procedure was fairly straightforward insofar as export of fabrics was concerned since the packed bales had to be physically exported under cover of an AR-4 form duly certified by the excise inspector of the unit with proof of shipment being shown subsequently to the inspector by an endorsement on the reverse of the AR-4 form by the mate of theshipping line certifying that the fabric has been exported in full.
Problems however arose when the fabric had to be processed after packing but prior to export. Clearances in such cases were under AR-3 form in packed condition or AR-1 form in loose condition and the processing could be carried out only in a unit covered under the excise processed goods had been brought back to the factory and examined by the excise inspector. Wastage in processing posed a subject matter of dispute more so when the excise inspector was not familiar with textile processing. Thus, under one pretext or the other, levy of excise duty was limited only to the organised sector of the textile industry and the large, unorganised sector producing almost 85 per cent of fabric production was left untouched.
Levy of excise duty on even those garments which ar produced in the organised sector presents problems which are further compounded than in the case of fabrics manufactured in the organised sector. This is due to the processinvolved in the transformation of a fabric into a garment. It is obvious that any garment manufacturer would like to utilise every centimetre of fabric usable, in garment making. That explains in fact, the increasing use of CAD/CAM in the industry which helps the garment manufacturer to cut the fabric in the most economic manner to avoid undue wastage. Even human ingenuity accumulated over a number of years is substituted by CAD/CAM operations. Wastage accruing thereby depends considerably on the type and design of the garments to be manufactured. This wastage will always be a sore point of dispute between a garment manufacturer and the excise inspector more so in the light of the latter being not familiar with the process of garment making. This will lead to a hold-up in clearance and if the clearance is for export purposes, the consequent loss of foreign exchange and the dis-reputation of India being a reliable supplier of garments can be well-imagined. Second, the posting of an excise inspector at everyorganised unit will pose an additional expenditure for the unit. He holds the key to garment clearances from the unit and has the possibility of being a source of corruption especially due to wastage generated in the process of conversion. Third, garment units will be tempted to decentralise their production activity leading to a further increase in the production in the unorganised sector, and possible loss of excise revenue to government.
Fourth, in the matter of garment exports, levy of an excise duty on garments will lead to an increase in the rate of drawback. It seldom happens (in fact, never) that (a) the increase in rate of drawback will fully neutralise the excise duty on garment; and (b) there is a perfect timing between the increase in drawback rate and levy of excise duty; consequently, exports will suffer in the intervening period. On the other hand, going by past experience, government is more inclined to lower drawback rates than increase them. Exports therefore will likely be the firstcasualty by levy of excise duty on garments. Even if Modvat is extended to garments, there will still be an uncovered portion of fabric excise duty which will have to be neutralised by higher drawback on garments. Fifth, excise duty on garments will increase the price of garments in the domestic market. With the current increase in prices of foodgrains and overall increase in prices of consumer goods, excise duty on garments will be one more burden on the consumer. Sixth, the increase in price of garments will affect not only outerwear but also innerwear which is popular with rural folk. Thus, the levy of excise duty an garments will hit the poorest of the poor which surely, is not the intention of government. Seventh, excise duty on garments will increase the price of accessories, like dupattas, stoles, shawls, ties , etc. , a large quantity of which is used by rural women folk, thus taxing the poor further. Eight, levy of excise duty on only five per cent of the garment industry which is in the organisedsector is unethical since it leave 95 per cent of the industry untouched and consequently increases the burden is administratively not feasible for the same reasons as in the case of the unorganised textile sector; in fact, the administration is far more difficult in the case of the garment industry due to its dispersion as well as due to various operations involved and the purchase of buttons, zip fasteners, hooks and the like from manufacturers of such attachments.
Ninth, in the event of market resistance arising out of increase in the price of garments due to excise levy, the initial casualty in the domestic market will be manufacturers of attachments which, in turn, will spread to the unorganised sector of the industry to closures and massive unemployment.In brief therefore, levy of excise duty on garments will be administratively difficult due to the large unorganised sector or jobbers, manufacturers of attachments / accessories and will lead to:
Fall in exports due to increase in drawback rates notfully neutralising the excise duty on garments. Increase in domestic price of garments adding to the burden on the consumer. Market resistance due to higher price leading to cut-back in production by jobbers, manufacturers of attachments / accessories, giving rise to closures and unemployment on a large scale. Consequently, levy of excise duty should be looked upon by government not only as a means of revenue but also from the social support that this industry offers to various strata and sections of the population. It would be in the overall interest of the government to leave this cottage industry untouched insofar as excise levy on garments in concerned, so as to enable the industry to continue to fulfil its social objectives, enable it to supply garments to the domestic sector as economically as possible, maintain and increase employment opportunities, and earn foreign exchange for the country.
