Budget 2011 Highlights and Impact on Apparel Sector AEPC Report

Budget provisions for the apparel sector:

1) Ready-made garments and made-ups of textiles are currently under an optional excise duty regime. As part of base expansion, to convert the optional levy into a mandatory levy at a unified rate of 10 per cent. The levy would however, apply only to branded garments or made-ups and not to those tailored or made to order for a retail customer. Credit of tax paid on inputs, capital goods and input services would be available to manufacturers of these products. Full SSI exemption is also being extended to these products. Export of these items would continue to be zero-rated. Impact - Cost of branded apparel are expected to increase by 10%. Since most of the inputs for these segments would be coming through optional excise duty regime, there will be very little duty credit to be utilized for payment of excise duty by them. Alternately, to enable branded RMG players to claim Cenvat credit, yarn and fabric manufacturers may be forced to pay a higher excise duty of 5 per cent vis-vis an optional and concessional 4 per cent duty that they paid earlier. Either way, costs will increase. Most of the branded readymade garment production in India is outside the SSI segment and therefore SSI exemption will not be of much help. Also, this duty coupled with the SSI exemption has the potential to further fragment the readymade garments and made-ups industries by encouraging small scale. Lower rate of central excise duty increased from 4% to 5%. This has resulted in increased excise duty for yarn and fabrics from 4% to 5% Impact - Since the optional regime continues to be applicable, this would not have any major impact on the industry. 3) Reduction of excise duty on 40 specified textile machinery (List 2 of Notification NO.6/2011-CE) from 10 to 5%

2)

Impact - Limited, since most of these machines are not manufactured in India. 4) 5% excise duty on automatic looms and projectile looms Impact - Would add duty burden on the machinery industry which will impact fabric manufacturers, including the decentralized powerlooms.

5)

Basic customs duty reduced: On Raw silk (not thrown) from 30 to 5 per cent On Acrylonitrile from 5 per cent to 2.5 per cent On Sodium Polyacrylate from 7.5 per cent to 5 per cent On caprolactum from 10 per cent to 7.5 per cent On Nylon chips, fiber and yarn from 10 per cent to 7.5 per cent On rayon grade wood pulp from 5 per cent to 2.5 per cent

Impact Reduce raw material costs of acrylic and viscose fibre manufacturers, and improve the price competitiveness of these fibres vis-a-vis cotton polyester.

6)

10 per cent excise duty on jute yarn, which was earlier exempted.

7)

To quicken the clearance of the cargo by Customs authorities, proposed to introduce self-assessment in Customs. Under this, importers and exporters will themselves assess their duty liabilities while filing their declarations in the EDI system. The Department will verify such assessments on a selective system driven basis. Impact Positive

8)

Rate of Minimum Alternative Tax proposed to be increased from 18 per

cent to 18.5 per cent of book profits Impact Positive but nominal.

9)

Rs 30 bn funding to NABARD to provide support to financially unviable handloom weavers with huge debt burdens.

Impact - This initiatives, according to CRISIL Report, will benefit 15,000 cooperative societies and about 300,000 handloom weavers. In general, help the revival of unorganized players in the handloom industry 10) 11) Surcharge on domestic companies reduced to 5% from 7.5%. Provision of around Rs. 3,000 crore for TUFS

Impact - Increase in budgetary allocation under Technology Up gradation Fund scheme from Rs. 22.67 billion to Rs 29.80 billion is a positive for the sector. But Companies that do not complete their capex related borrowing by the due date of March 31, 2012 will have to incur higher borrowing cost as the interest subvention under the Technology Upgradation Fund (TUF) will expire by that date.

Other Highlights
Gross Domestic Product (GDP) estimated to have grown at 8.6 per cent in 2010-11 in real terms. Exports have grown by 29.4 per cent, while imports have recorded a growth of 17.6 per cent during April to January 2010-11 over the corresponding period last year. Indian economy expected to grow at 9 per cent with an outside band of +/- 0.25 per cent in 2011-12. Average inflation expected lower next year and current account deficit smaller.

Tax Reforms Direct Taxes Code (DTC) to be finalised for enactment during 2011-12. DTCproposed to be effective from April 1, 2012. As a step towards roll out of GST, Constitution Amendment Bill proposed to be introduced in this session of Parliament but no dates proposed for roll out Some legal services to be brought under service tax net. Service by an individual to another individual exempted

Special Economic Zones to come under MAT National Manufacturing Policy Share of manufacturing in GDP expected to grow from about 16 per cent to 25 per cent over a period of 10 years. Government will come out with a manufacturing policy. Two Committees set up for greater transparency and accountability in procurement policy; and for allocation, pricing and utilisation of natural resources.

Exports Suggestions made by Task Force on Transaction Cost, constituted by the Department of Commerce are being implemented to reduce transaction cost by 2,100 crore Mega Cluster Scheme to be extended for leather products. Seven mega leather clusters to be set up during 2011-12. Jodhpur to be included for the development of a handicraft mega cluster.

Companys Tax Lower rate of 15 per cent tax on dividends received by an Indian company from its foreign subsidiary.

Indirect Taxes To stay on course for transition to GST. Central Excise Duty to be maintained at standard rate of 10 per cent. Reduction in number of exemptions in Central Excise rate structure. Nominal Central Excise Duty of 1 per cent imposed on 130 items entering in the tax net. Lower rate of Central Excise Duty enhanced from 4 per cent to 5 per cent. Peak rate of Custom Duty held at its current level.

Service Tax Standard rate of Service Tax retained at 10 per cent Service Tax net increased to include more services like air travel both, hotel etc.