Union Budget 2020: Continued access to incentives crucial for textile investments

By ICRA Ltd

Adequate provisioning for Amended Technology Upgradation Fund Scheme (ATUFS) subsidy – There had been a considerable reduction in budgetary allocation towards one of the flagship schemes of the sector, namely ATUFS, from Rs. 2,300 crore for 2018-19 to Rs. 700 crore for 2019-20. This primarily aims at incentivising capital investments in the downstream segments of the textile sector. Even though the amount was nearly in line with the actual spend of Rs. 623 crore, estimated for 2018-19, a low spend points to the slower pace of incremental capital investments in the sector and/or slow pace of releases. Continued access to these incentives remains crucial for encouraging investments in India’s downstream textile segments.

Clarity and adequate provisioning for export incentive schemes – The export segment of the domestic textile sector is facing multiple challenges, including intense competition, heightened by preferential duty access available to certain peer nations, the subdued demand from some of the key markets and continued uncertainty on the export incentive structure. Also, delays experienced in clearance of some export incentives have affected the liquidity profiles of the exporters, further constraining their performance. In March 2019, the Government of India had notified the replacement of the Remission of State Levies (RoSL) scheme with the scrip-based Scheme for Rebate of State and Central Taxes and Levies (RoSCTL) for export of garments and made-ups.

This was done as a step towards eventual withdrawal of the export incentives, which are not compliant with the World Trade Organisation (WTO) norms. Accordingly, in the last Budget for 2019-20, allocation towards RoSL scheme had been reduced to Nil vis-a-vis Rs. 3,664 crore estimated for 2018-19. Although the RoSCTL scheme, with a wider scope for rebates, together with continued provision of the Merchandise Exports from India Scheme (MEIS) benefits, was expected to provide a temporary impetus to profitability of the apparel and made-up exporters, procedural issues and resultant delays in clearance of the RoSCTL dues have been observed in the current financial year.

This apart, the scheme benefits are available only to apparel and made-up exporters. As some other segments such as cotton spinning are also facing headwinds in the export market, there have been increasing demands from the industry to expand the scope of RoSCTL to ensure refund of all input taxes across segments. Accordingly, clarity on rates and procedures as well as adequate provisioning for the export incentive schemes remains crucial for the liquidity and hence performance of the textile exporters.