Footwear makers seek to step into their own shoes

As the country looks forward to the rollout of the Goods and Services Tax (GST), which is now likely on July 1, speculations are rife in every industry. One such industry is that of footwear. As a significant part of the fashion industry, it is hoping for GST to play a role in the ironing out of differences with its counterpart, the apparel industry.

Firstly, to put things into context, from the consumer standpoint, apparel and footwear, both fall under the single category of fashion. However, from the supply standpoint, tax and duties treat each of these as different. While the basic customs duty remains the same for both at 10%, countervailing duty (CVD) and excise duty, at 0% to 4% for apparel and around 12.5% of maximum retail price (MRP) for footwear is a huge game-changer. Moreover, value added tax (VAT) for footwear averages at about 14% across the country, whereas for apparel, it is at about 5%.

With blaring dissimilarities in the taxation structure, the footwear industry is at a general disadvantage compared with the apparel industry. Now, as GST is expected to be the leveller, DH talks to industry players to understand what they anticipate.
Monrow Shoes Head of Brand Veena Ashiya says, “Having higher excise on footwear makes it harder for the industry to compete with apparel brands, when it comes to consumer wallet share.

Pressure is definitely high as in consumers’ mind, footwear and apparel fall under the same category as lifestyle. So many successful apparel brands have emerged in India and footwear can experience the same boom provided the government sees this as an opportunity to  propel  the footwear industry growth.” Monrow is a premium women’s footwear brand, which was recently launched in the market.

Woodland India Managing Director Harkirat Singh says, “The differential in VAT not only escalates the price of footwear, but also adds to cost of compliance, which in turn is ploughed back into the cost only. Consequently, footwear price becomes in-competitive compared with garments for no justifiable reason.”

Max Fashion India Executive Director Vasanth Kumar says, “Duties on footwear have always been higher, even when we are not comparing footwear and apparel. It is a natural drawback. Therefore, hopes from GST to aid the industry are quite substantial.” Max Fashion, which was launched as a value fashion brand in 2004, has a chain of 400 stores in 120 cities, and imports up to 12% of its merchandise, including footwear and apparel.

“With reduced disparity in the taxation structure, the entire process can be streamlined. Consolidation of warehouses and increased speed in the handling and transportation of goods would lead to improved business efficiency,” he adds.

Crocs India Managing Director Deepak Chhabra says, “Footwear is subject to about 12.5% excise duty or CVD, which is marked on MRP. The impact of this becomes huge because MRP is usually four times the cost of the product. Apparel on the other hand does not face such high duties. GST, if anything, should be able to bridge this gap, in terms of the comparative advantage apparel enjoys.”

A step too many

Multiple levels of taxation are not only cumbersome, but also shift the company’s focus away from its products and consumers. GST is expected to make the country more organised and improve the much talked about ‘Ease of Doing Business’ scale here.

Not only will it level out the playing field for organised players, but also give them the capacity to compete with unorganised players in terms of pricing.

“Multiple levels of taxation, including CST, VAT, excise and octroi will be eliminated, which will ease the whole taxation process to a large extent. This itself will offer huge relief. Moreover, if things go as expected, companies’ bottomlines will be the biggest gainers. There can be up to 4% addition to bottomlines, which would be a translation from savings,” says Chhabra.

Ashiya says, “Since a large segment of sourcing happens through imports, GST will ease up the CVD cost. Hopefully, this will make domestic factories a lot more organised and open sourcing doors for brands in India,” adding, “Service forms a huge part for the footwear brand pricing, hence, the input credit which can be availed makes bottomlines a lot healthier.”

Singh asserts, “If we are able to surmount initial hiccups due to novelty of legislation and its effects, GST is going to bring prices down after a period of three to five years.”

In this context, Red Chief Vice President Raman Kumar says, “GST will enable easier interstate movement of goods. Purchasing across states will be more hassle-free, as a unified tax structure will allow easy payments and tax calculation, while avoiding double taxation.” 

With a lot riding on the GST roll out, the taxation slab that would be applicable for footwear, becomes highly consequential. On this, Kumar of Max Fashion India says, “What we are looking at, is a rate of 12%. This would be the best case scenario. Anything else would still exert some pressure on prices.”

“There is apprehension that footwear may again be taxed adversely at 18%, while garments at 12%, as per confirmed reports. If this be so, footwear shall again be at the receiving end only,” augments Singh.

“Ultimately, GST must be implemented with clear concept so that every industry must be clear about this. After GST, a single taxation process must be followed by corporate, and leather’s rate of GST must fall near the 12% range,” opines Raman Kumar.

However, says Chhabra, “With a 12% rate applicable for apparel, the same would be ideal for footwear as well. However, even an 18% rate, which the industry is preparing itself for, would be okay. Compared with the current situation, 18% rate will still offer relief.”

“Treat footwear the same as apparel, as from the consumption point of view, they are same. Then why different level of taxations? If the government can realise amazing success stories built in India in apparel,  the same can happen in footwear if the taxation levels are same. India is the second largest footwear producer of the world, and not even a single billion-dollar brand hails from India yet? I think that the answer lies in creating fair and levelled taxation for the footwear industry and see it boom like apparel,” opines Ashiya.

At 22 billion pairs of annual production, India is the second largest footwear producer in the world, next only to China. As a consumer, the country stands third, after China and the US. Even as a major section of the market is captured by unorganised players, organised manufacturers are rapidly gaining ground with ecommerce and increasing fashion consciousness. Shift in consumer behaviour is being marked by reduced price-sensitivity and increased disposable income. The trend is looking at substantial boost from the GST rollout.