Textile Firms Under GST Lens for Misclassifying Services
The Central Goods and Services Tax (CGST) department has launched an investigation into multiple textile manufacturing companies across India over suspected misclassification of services to avoid higher tax rates. The inquiry focuses on firms allegedly paying lower GST rates under incorrect tax classifications, resulting in substantial revenue losses.
Misclassification of Services Under GST
Several textile manufacturers are reportedly categorizing fabric processing activities under “washing and dyeing” to take advantage of the lower 5% GST applicable to job work services in the textile industry. However, when processes such as bleaching, printing, and other significant fabric alterations are involved, the applicable GST rate is 18%. Officials believe that many companies are deliberately misclassifying their activities to evade the higher tax bracket.
The CGST department is closely examining records of several firms, including both large corporations and small to medium enterprises, to identify discrepancies in tax payments. Authorities suspect that these misclassifications have led to a substantial shortfall in tax revenue, prompting intensified scrutiny.
Revenue Loss and Government Action
Preliminary estimates indicate that this misclassification has caused a revenue loss running into hundreds of crores. The CGST department aims to recover unpaid taxes and ensure stricter compliance within the industry. The ongoing investigation is expected to result in financial penalties and legal consequences for firms found guilty of tax evasion.
Challenges in GST Classification
Industry experts believe that ambiguities in GST slabs have contributed to the confusion, leading to possible misinterpretations by textile manufacturers. While some argue that the classification system is complex and unclear, tax officials maintain that firms are deliberately taking advantage of loopholes to reduce tax liability.
The textile industry has previously raised concerns over the fluctuating GST rates on processing activities. A proposal to increase the GST on dyeing and printing services to 12% was considered in the past but was ultimately not implemented. The current investigations highlight the need for clearer regulations to prevent tax disputes and ensure compliance.
As the probe continues, the government is expected to tighten tax monitoring in the textile sector and take corrective measures to close loopholes in GST classification. The outcome of these investigations will likely have a significant impact on taxation policies and compliance practices in the industry.
