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Tirupur pleads for special treatment

Admittedly, the president of the Tirupur Exporters’ Association (TEA), Mr A Sakthivel has done a good job in presenting the special case of Tirupur knitwear exporters to Dr Vijay Kelkar, chairman of the task force on direct and indirect taxes in the Union ministry of finance. During the course of the pre-budget discussions, the finance minister, Mr Jaswant Singh, is known to be advising the various industry representatives to present their views to Dr Kelkar, leaving an impression that Committee’s recommendations would have a bearing on the budget proposals.

In that context, the TEA is, indeed, prudent that it has built up a special case for Tirupur. After all, a tiny town with just basic infrastructure is now attracting foreign exchange of over Rs 5,000 crore annually. That is why the Exim Policy describes Tirupur as a ‘Town of Excellence’. If so, it is only logical that the approach of the government towards the taxation policy commensurates with this description. And, the basic aspect which Mr Sakthivel has sought from Dr Kelkar is the removal of an anomaly under Section 80 HHC of the Income Tax. As per this section, export profits are exempt from income tax to the levels prescribed. But, even the 100 per cent Export Oriented Units (EOU) are allowed to sell off to 35 per cent of their production in the Domestic Tariff Area (DTA). So also, the units in the Special Economic Zones or the Duty Free Zones. But, because the knitwear export units in Tirupur do not come under these categories, they do not enjoy the benefit of tax exemption even when they sell just five per cent of their production in the home market. So, the TEA has urged Dr Kelkar to suggest the introduction of a new category called export unit (domestic). This suggestion by itself is not new. The TEA had made it many times in the past to the government. The suggestion is that units exporting 90 per cent of their production should be treated as EU(D) and they should also get benefits under the Section 80 HHC. The underlying message is that a number of knitwear units in Tirupur would benefit.

Considering the very severe competition faced by the knitwear units of Tirupur in the global environment, the TEA has sought a pro-active role by the Kelkar committee to help the creation of a level playing and ground and competitive advantage for the industry here.

This is necessary in the context of the government desiring to grab a sizable share for the knitwear trade in the global market in the next five years. More so, given the high competition faced in the cash-rich EU, USA, Canada and Japan.

This is where the suggestion to provide duty draw backs for the hidden costs bears relevance. In China, for instance, exporters get a reimbursement of 17.5 per cent of the VAT while in India, it does not exceed 12 per cent of the excise. So, a Chinese exporters is able to price his produce at least 5 per cent lower than his Indian counterpart. And, the hidden costs are due to the inability of the state to provide adequate power. In Tirupur, for instance, Mr Sakthivel says, there is an unofficial power cut from eight to 10 hours each day. During this period, the manufacturing and job works units have to use their own generators. This leads to a consumption of diesel. But, diesel comes with a price tag inclusive of an excise duty. When the exporter procures his finished goods from the job works, the price he pays is inclusive of the diesel cost which is again inclusive of the diesel cost. Again, when the goods are transported to the ports in Chennai and Tuticorin, the transportation cost is inclusive of the expenses on diesel which again is inclusive of an excise duty on it. So, the exporter pays the excise duty on diesel many times, but this remains hidden. The TEA’s contention is that these hidden costs should be included when calculating the duty drawbak. Then the comes the question of exempting the knitwear units in Tirupur from the purview of imposing unbroken CENVAT. The principal contention is that for the manufacture of one T-shirt for export, the material is sent to 10 different places for job works. So, if the knitwear to be brought under MODVAT chain, some 100 officers have to be appointed to man the central excise department, but since the finished goods are exported, the additional benefit to the exchequer is nil. On the other hand, the small units have to undergo avoidable and unproductive effort in catering to the needs of the central excise department.

Mr Sakthivel has a valid point. There are as many as 1,500 sewing units, 1,000 job knitting, calendaring, combating and finishing units, 700 dyeing and bleaching units, 500 embroidery units, 100 printing and 50 hand work units providing services to the exporters in Tirupur. "Ours is a peculiar place. Here, you can have a one-room office and yet export goods worth over Rs 20 crore. Here, you can outsource your production requirements as the job works are available in plenty from knitting to finishing. The Tirupur exporters have never claimed MODVAT credit from the government," Mr Sakthivel asserts. It is imperative that either Dr Kelkar should agree to this view point or adequately explain why he differs.

- P S Sundar