GST on Shawls: Rate Irrationality

Handicrafts is not just a sector of the Kashmir economy. It is a sub-economy; an artisanal sub-economy to be precise. It is a creativity-led, informal, primarily rural with urban conglomerations enterprise that provides employment and livelihood to more than 3 lakh people in the Valley.

Besides, it is an intrinsic part of the cultural identity of Kashmiris and a regenerative symbol of their cultural heritage. So interwoven are crafts with culture that these enterprises should be classified as “cultural industry” of Kashmir. Indeed, cultural industries are recognised by the UNESCO and get intellectual property rights protection and exceptional tariff treatment under the General Agreement on Tariffs and Trade (GATT).

The product that defines Brand Kashmir -- Napoleon Bonaparte gifted his wife, Empress Josephine, a Pashmina stole around the dawn of the 19^th century -- is the Kashmiri shawl.  Hence, the social and emotional equity of shawls is very high. As such, the two elements, viz employment and cultural identity, on which much of Kashmir politics has always been pivoted, should determine the overarching policy framework for this sub-economy. Within that, sectoral policies – fiscal and non-fiscal – must be formulated.

At the macro level, it needs to be appreciated that the handicraft enterprises are the most ideal for an economy like ours: low capital use, high employment intensity and a wide geographical dispersal of income generation. It is a business that can generate huge employment and income in J&K with minimal use of capital.

Even as this is so, there are no firm and robust estimates of the size of the J&K handicraft market in terms of production, sales and revenues. However, if foreign exchange earnings are used as a proxy, this sector generates Rs 1,700 crores annually.  This number is at variance with other estimates and hence a benchmark census needs to be done.

The global handicraft market size has reached $ 900–1000 billion in 2024. Looking ahead, in the next 5 to 7 years, it is expected to double, reaching USD 1,900 – 2100 billion by 2033. The Indian handicrafts market estimated to be US $ 4,300 million in 2023 is expected to grow to $ 8,000 million by 2033. The $ 20 million handicrafts production is a drop in this ocean, but the challenges are outweighed only by the opportunities.

Instead of helping Kashmiri shawls grow riding the wave of sustainability across the globe, the GST Council Group of Ministers has proposed increasing the tax. The GST on Kashmiri shawl and crewel items above Rs 10,000, is recommended to be increased from the current median rate of 12 per cent to the slab of 28 per cent.

Notwithstanding the fact that GST is not a tax on the producers but on the consumers, the proposal to hike it to 28 per cent is patently against the basic principles of GST and its architecture. The rate band of 28 per cent, the highest band, is a punitive rate meant to reduce the consumption of what are called “demerit” goods. Indeed, a subset within rate band is the “sin goods” category like cigarettes, for instance. By taxing Kashmiri shawls at 28 per cent, the integrity of the GST rate regime is being impaired.

The Kashmiri shawl seems to have been put in this bucket on the spurious notion that a Kashmiri shawl above Rs 10,000 is a luxury good and hence to be taxed at highest punitive rate to reduce the consumption in this category. But that is a flawed understanding. The luxury goods in this category, like BMW car or other luxe items are the ones with a high import content.  As such, bracketing shawls with luxury & sin goods is patently absurd.

From a trade and growth perspective, this rate hike goes against the stated policy of India becoming a dominant handicraft player globally. GST, it needs to be recalled, is a consumer tax, unlike the earlier tax regime of Sales tax and Value Added Tax which were producer taxes. So, technically speaking the hike in tax is on the consumers and should not burden the producers, which in this case is the artisan or the traders.

But what the tax hike will hurt is the demand for handicrafts; the price elasticity of demand for handicrafts being very high. The handicrafts are a price sensitive commodity and any increase, tax or otherwise, will reduce the demand. With China having entered the shawl market with polyester shawls and garnering bulk orders at very competitive prices, India will stand to lose export earnings from this segment.

More importantly, given the oligopsony structure of handicrafts trade, the intermediaries will use the hike as a lever to reduce the purchase price by squeezing the existing wafer-thin margins of the artisans. This market imperfection will hurt the artisan, who is most vulnerable and result in a death knell to this vibrant sub economy.

The GST Council in the formative years of 2016-18, deliberated keeping handicrafts in the zero-rate bucket. While it would have seemingly been a positive signal, it would not have led to the much-needed formalisation of the handicrafts sub-economy. Putting the handicraft products in the 5 per cent slab, as done initially, was to allow the artisans to avail of the Input Tax Credit (ITC). Given that materials used are often purchased from registered units, the incidence of tax would have been close to zero or even a net positive refund.

In the case of Kashmiri handicrafts, with the CGST part being reimbursable, the effective GST on shawls and crewel was expected to be around 2.5 per cent, i.e., only the SGST component. Even after it was placed in the 12 per cent tax bracket, the effective rate was to be 6 per cent which would enable the enterprises to avail the ITC which would make the incidence of tax less than 3 to 3.5 per cent.

Operationally, it is difficult to expect household craft enterprises to do the required accounting and maintain paperwork. For that, and this is a critical piece that was to be pursued by the state government, the Reverse Charge Mechanism (RCM) has to be instituted. As per normal mechanism, the receiver of Goods pays GST to the supplier who in turn deposits it with the Government. Under RCM, GST is paid and deposited with the Government by. recipient of goods, on behalf of the supplier.

Another way to minimise the adverse demand impact of an increased tax is to explore the option of using assessable value of goods for those handicrafts which are now use imported raw materials largely from China.  The provisions for this are laid out in the CGST Rules of 2017.

As such, along with a strong case that should be made out in the GST Council when it will be discussed at the upcoming 55th GST Council meeting on December 21, the local government must get its act together to reduce the incidence of tax by levying the SGST component to create a pool for financing positive subvention of the artisans.