Impact of GST on leather business

Leather Industry on GST

Over the years the Indian Leather Industry has undergone drastic change from being a mere exporter of raw materials in the early 60’s and 70’s to an exporter of finished, value- added leather products. The main reason behind this good transformation is the several policy initiatives taken by the Government of India. Indian leather industry currently is one among the top 8 industries for export revenue generation in India, holding 10% of the global raw material, and 2% of the global trade. India has become biggest livestock producer in the world with the capacity of 1.8 billion sq. Feet of leather production annually. Global footwear of 13% production comprising of 16 billion pairs are made in India. India today produces 2065 million pairs of various categories of footwear. It exports 115 million pairs, thus having 95% of its production to meet its own domestic demand.

Market Capitalization- 

Among all the industries the footwear industry in particular holds greater potential for investments in India. Today India produces approx 700 million pairs of leather footwear every year and accounts for an 18% share of the total Indian leather Export.

Size of the Industry- 

Indian leather Industry today has capacity to produce 1776 million pairs; 112 million pairs of Shoe Uppers. Though India is the second largest producer of footwear and leather garments in the world, India accounts for a share of close to 3% in the global leather import trade of US$ 137 billion.

The introduction of GST would thus be environment friendly- 

Based on various computations, the revenue neutral GST rate across goods and services is expected to be positioned somewhere in the range of 6.2 per cent and 9.4 per cent, depending on various scenarios of sectoral exemptions. In sum, implementation of a comprehensive GST in India is expected to lead to efficient allocation of factors of production thus leading to gains in GDP and exports. This would translate into enhanced economic welfare and returns to the factors of production, viz. land, labour and capital.

Structure Of the Industry 

The leather industry is spread in different segments, namely, tanning & finishing, footwear & footwear components, leather garments, leather goods including saddler & harness, etc.

With tanning and finishing capacity for processing 1192 million pieces of hides and skins per annum spread over different parts of the country, most of which is organised along modern lives, the capability of India to sustain a much larger industry with its raw material resource is evident. In order to augment the domestic raw material availability, the Government of India has allowed duty free import of hides and skins from anywhere in the world. It is an attraction for any foreign manufacturer who intends to shift his production base from a high cost location to low cost base.

India is one of the largest producers of saddlery and harness goods in the world. The saddlery industry was established in the 19th century primarily to cater to the needs of military and police. From then on initiatives were taken to develop, the industry and today there are over 150 units in the organised sector, out of which approximately 105 are 100% export oriented units. The export of saddlery and harn’ess items have showed an annual growth rate of about 40% reaching DM 64 million during 1998-99. The major importers of Indian saddlery are Germany, USA, UK, France, Scandinavia, Netherlands, Japan, Australia and New Zealand.

The Leather Garment Industry occupies a place of prominence in the Indian leather sector.  The product classification of leather garments comprise of jackets, long coats, waist coats, shirts, pant/short, children garments, motorbike jackets, aprons and industrial leather garments. Indian leather garments, which entered the world market only in the mid-eighties with exports of Rs. 15 crores in 1997-98, account for about Rs. 1530 crore in 1997-98.  The major export destination of leather garments from India is Germany.  In 1997, German imports of leather garments aggregated DM 1786 million of which DM 304 million worth of imports went from India.  India, China and Turkey were the major suppliers of leather garments for the German market, as they accounted for about 78% of the market share. Among the three major exporting nations of leather garments, India maintains a similar level of market share of about 20%, in both German and EU markets. Other markets for India include Italy, U.K., U.S.A. France, Spain and Netherlands.  Recently, successful attempt had been made for exports to Denmark, Switzerland and Canada.

Global Scenario :  

The global trade in leather and leather products has been increasing over the years from mere US$ 4 billion in 1972 to US$ 70 billion in 1997. Although the exports of Indian leather and leather products have grown manifold during the past decades, our country’s share in global trade is around 3% among world imports of leather products. Whereas India’s share in world imports of leather footwear is 1%.

 Expected Impact Of GST-  

Introduction of GST is expected to improve the prospects of engineering, capital goods and power equipment (ECPE) sector by simplifying the tax structure. The complexity in this sector is that companies are involved simultaneously in manufacturing of goods and rendering of services However, in general, a comprehensive tax like GST which would combine the state and central taxes in a single structure and where tax credit would be available at each stage of production and final sale so that double taxation could be avoided. This would bring in more cost competitiveness to the domestic players. In this sector indirect tax range is much wider as compared to the other sectors where the product range is limited. Hence, depending upon the products manufactured by the company and services rendered, basket of goods provided in the EPC contract, it goes upto around 30% and any GST below this could improve the cost competitiveness of players in this sector.  The Budget proposal to reduce the excise duty on footwear with leather uppers and having retail price of over Rs 1,000 has been welcomed by the industry, saying the move will help increase competitiveness.”The footwear industry is particularly bullish as for shoes having MRP of above Rs 1,000 per pair will now attract half the excise duty by halving the duty from 12 to 6 per cent,” Liberty Footwear Chief Executive Adesh Gupta had said.

The move will provide boost to the domestic leather footwear industry and help it compete globally, he said adding, “It would also help provide a level-playing field for the organised sector and would result in integration of unorganised sector into organised sector.”Reacting to the announcement, Woodland, Managing Director, Harkirat Singh had  said: “We were expecting total removal of excise duty the budget has only halved it but will be beneficial to leather manufacturers and many other brands in the footwear industry.”Echoing similar sentiments, EY, Tax Partner, Bipin Sapra said, “The decrease in price of footwear is a welcome move amidst the increase in cost of living of a middle class household on account of increase in service tax and excise rates.”

The Finance Minister has also announced implementation of GST from April 2016. Welcoming this move, Singh had said, “The announcement by the FM to introduce GST from April 2016 will definitely rejuvenate the retail industry. This initiative would play an important role by increasing buoyancy and reducing the cascading effect of tax. GST would play a transformative role and bring about revolution in the economy. 

Cost/ pricing economics for the finished goods: The GST regime would also make the industry rework the entire cost economics, as regards – (i) the taxation/ duty structure for procurement of raw materials; (ii) stage-wise levy of excise duty on production; (iii) service charge on job work; (iv) sales tax on interstate movement; (v) value added tax in the selling state; and (vi) input credit availment mechanism for excise duty/ VAT/ service tax etc. which would all stand abolished to give birth to a single-structured, self-adjusting GST, attracted on the eventuality of sale of finished goods.

This cost/ pricing economics would further stand corrected due to the taxation methods of stock transfer vs sale, reduced need for multiple compliance authorities/ formalities, need to refit a modified version of ERP tools, and adjustments in manpower/ supply chain management cost.

Location of each segment of business enterprise is one priority, in my view, that merits the attention of all unit owners, especially those having pan-India presence. They would have to rewrite their business location economics: (a) as to the location of their procurement and manufacturing centres, keeping in mind the GST environment, as against the historical rationale of the source of raw-material/ skilled manpower/ demand zone etc.; (b) the location of the mother depots for raw materials/ finished goods/ billing and so on, given the fact that stock transfers would also attract GST with related implications on working capital management; (c) and the location of selling units would be determined based on the incentives offered by the States, considering that the GST benefits would flow more into the kitty of consuming states.

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