Over two dozen textile manufacturing enterprises nationwide have been the subject of investigations by Central Goods and Services Tax (CGST) inspectors in recent months for misclassifying textile processing activities and thus paying lower taxes.
Official sources claim that the CGST department has noticed that a number of textile manufacturers are classifying activities that entail “changing the nature of cloth” as “washing and dyeing” in order to reduce the tax rate on their earnings.
According to the GST regulations, the textile industry’s “job work services” of washing and dyeing are subject to a 5 per cent GST rate, whereas procedures that drastically change the fabric—like bleaching, printing, or other treatments that change its fundamental properties—are subject to an 18 per cent GST rate.
Textile manufacturers are intentionally misclassifying services and paying a 5 per cent tax when they should be paying 18 per cent. CGST officials are currently investigating units from various types of firms, including corporate entities and small to medium-sized companies, across India, according to an official.
Tax experts suggest that the GST misclassification in the textile industry is due to confusion over tax slabs. Sivakumar Ramjee, executive director of business management consultant, Nangia Andersen, pointed out that some manufacturers have reportedly misclassified transformative processes under the 5 per cent category. The issue arises from multiple GST rates, vague definitions, and possible misuse.
