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Insight | Time:Jul 14 2017 4:39PM
Indian tax reform to hurt rayon industry
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India's biggest tax reform is now a reality. A comprehensive dual Goods and Services Tax (GST) has replaced the complex multiple indirect tax structure from 1 July 2017. Under GST, goods and services are taxed at the following rates, 0%, 5%, 12%, 18% and 28%. It is good for tax cost reduction of many industries, but the impact on each industry is quite different.

To textiles, items such as natural fiber, including cotton, cotton yarn, grey fabric and apparel below Rs 1,000 will be taxed at 5%. Apparel above Rs 1,000 will be taxed at 12%, man-made fiber and man-made fiber yarn will be under the 18% category.

Viscose fiber is landed in a passive position due to the huge gap between man-made fiber and cotton. GST is similar to China's VAT, which can be deducted, but compared 18% for rayon yarn with 5% for grey fabric, tax payment of upstream apparently far exceeds the deduction of downstream. Take Chinese market price for instance, if ring-spun rayon single yarn 30S at 20,000yuan/mt is after-tax price in India, 3,050.85yuan of GST is included for per ton of yarn. If rayon grey fabric price is around 25,000yuan/mt and applicable tax rate is 5%, then GST is 1,190.48yuan for per ton of fabric. Assuming that one ton of rayon grey fabric consumes one ton of rayon yarn, 1,860.37yuan of GST shall be wasted without being deducted.

Product Specification After-tax price Tax rate Tax amount
Rayon yarn Ring-spun R30S 20,000 18% 3,050.85
Rayon grey fabric 30*30 63 25,000 5% 1,190.48

GST is compulsory tax, so the wasted tax can just be reflected through two ways: 1. the tax will be afforded by downstream market, thus performance price ratio of rayon products will significantly reduce compared with cotton products. Viewed from the following table, assuming that rayon yarn price equivalents to cotton yarn price (pre-tax) and grey fabric is still sold at 25,000yuan/mt, if fabric mills afford upstream GST, it will cost 20,060yuan/mt to buy rayon yarn, but just pay 18,190.48yuan/mt to buy cotton yarn.

Product Tax rate Pre-tax price After-tax price Tax amount to be paid by cash Actual payment
Cotton yarn 5% 17,000 17,850 340.48 18,190.48
Rayon yarn 18% 17,000 20,060 0 20,060

2. The tax will be respectively undertaken by viscose fiber plants and spun yarn mills, which will obviously push up the cost of producers. The profit margin of traditional industries is generally no higher than 5%, but the wasted tax amount takes up over 10% of product price, which could be hardly accepted by upstream market.

The new GST policy is evidently negative to viscose fiber and rayon yarn industry, whether tax rebate, subsidy or adjustment of applicable tax rate will be published needs further observation. To other synthetic fibers, the applicable tax rate still needs further confirmation.
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