Correcting the warp

Going by the steady stream of news reports, some high profile pressure tactics, and the reported dip in textile tax collections in 2003-04, it would appear the Ministry of Finance is seriously considering rolling back the tax measures introduced for this industry by Jaswant Singh in his Budget last year.

If so, this would be unfortunate, for apart from unravelling several years of effort, it has serious implications for the competitiveness of the textiles sector on the eve of the abolition of the quotas that govern world textile trade under the multi-fibre agreement.

Prior to the Jaswant Singh Budget, few in the unorganised textiles sector paid taxes. The reason was simple. While the larger processors/garment manufacturers had to pay an excise duty on the finished product, they were given a “deemed credit” for the tax that should have been paid by others along the chain.

So, process houses/garment manufacturers were not overly bothered by whether the spinners or weavers had paid taxes upstream. Jaswant Singh’s Budget abolished the concept of “deemed credit”, so it became incumbent on all spinners and power loom weavers to pay duties as well if the final process house wanted to avail of the tax credit.

Since this meant the unfair advantage that power looms had over the composite mill sector was done away with, composite mills began drawing up plans to expand capacity. (By levying an excise duty on hank yarn, and later refunding it to genuine handloom players, the Budget a year earlier had already plugged huge tax evasion by power looms that used tax-free hank yarn supposedly meant only for handlooms.)

In other words, since it is obvious that only large mills can supply against large export orders and do so with consistent quality, India’s export competitiveness in a traditional strength looked like it was on the road to improvement.

It is true, of course, that during the year, Jaswant Singh introduced all manner of concessions that undid a lot of the good work he had done.

But the pressure for a rollback has now mounted on Mr Chidambaram because many newly elected members of Parliament, including the textiles minister Shankar Singh Vaghela, argue that the real result of Jaswant Singh’s tax changes is that the poor power loom weaver faces endless harassment by tax officials.

If that is true, though, the law has enough preventive provisions that need to be applied. For one, it clearly says that no “job worker” (and that’s what most power loom weavers are) would come under the Cenvat chain provided the master weaver, whose work they do, is part of the chain.

Indeed, enough written clarifications have been issued by the central excise authorities, asking taxmen to stay away from power loom workers and to concentrate on the master weavers/traders who in actuality control the business — typically, the trader buys the yarn, gives it to power looms to weave, pays them for the work and collects the cloth, then sends it for processing.

If this is in fact the case, the Ministry of Finance would do well to shun the idea of rolling back the tax changes. Instead, it should focus on reining in erring taxmen who, it could be argued, are hand in glove with those traders who do not wish to come into the tax net, and are deliberately harassing power loom workers in an attempt to scuttle the scheme. To use some textile terminology, the task is to fix the warp in the scheme, not to unravel it completely.