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Clothes to get dearer - Views on News from Equitymaster
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  • Mar 18, 2011

    Clothes to get dearer

    Food, clothing and shelter are our basic human needs. We expect these bare minimum essentials to be within our reach even in times of high inflation. However, this does not seem to be the case in India at present. After unreasonably high levels of food inflation that was burning a hole in the pockets of Indians, now, even clothing is bound to become costlier. Although we are aware about the present Indian Government’s connect with "aam aadmi", we fail to understand what measures are being taken to protect the interests of this "aam aadmi".

    In the recent Union Budget, our finance minister announced a levy of mandatory 10% excise duty on branded garments. This was done with an intention to bring the branded readymade garments under tax net. As expected, the retail companies which were already reeling under high input costs, have decided to pass this on to the ultimate consumers. While some retailers have already announced their plans to hike prices, others will soon follow. This will further increase the woes of the common man suffering from inflation.

    Some of you might be wondering how this will affect the common man. You might say, "A common man is satisfied if he is sufficiently clothed irrespective of the brand". "Usually, it is the economically well off people who flaunt these brands". Well, these may not actually be true. To understand this, let us first define this frequently misused word "branded".

    What does Branded mean?

    As per the Government, branded garments may mean any garment which bear a brand name or are sold under a brand name. It will be interesting to know the origin of this word "brand". It is derived from the Old Norse brandr meaning "to burn." It refers to the practice of producers burning their mark (or brand) onto their products. In early times, farmers used to identify their livestock with a burn mark or a symbol. Thus, a branded good could mean anything that differentiates the products of one manufacturer from another. In our context, branded garments include all goods that have a specific logo, tag, monogram or any other identification mark associated with them. Branded does not necessarily refer to goods produced by Nike, Bata, Tommy Hilfiger and the likes and their brand names do not necessarily have to be registered. Moreover, this proposed hike is on all branded garments as well as other made-up textile products like curtains, bed linen, table linen, etc.

    Earlier, all these apparels were subject to voluntary excise duty whereby the discretion of duty payment was with the manufacturer. He could avail of Cenvat credit only if he chose to pay excise duty and not otherwise. With effect from March1, 2011 these will attract a compulsory excise duty at a unified rate of 10%.

    Impact on Retailers

    Retailers across India have been voicing out their discontent with regards to the mandatory excise duty. More than 20,000 garment retailers went on a nationwide strike on March 7 to protest the proposed change. Earlier in the month, clothes manufacturers had also shut their factories across India.

    The new levy is likely to adversely affect the Indian retailers. The administrative costs will rise for the manufacturers on account of increased paper work and complying with excise related formalities like registration. These costs will get transferred to the retailing companies in the form of higher input costs. The levy was introduced with immediate effect and the companies feel that they cannot change to the new taxing regime on such a short notice. It is not just an increase in tax rates; it is rather a change in taxing policy for the industry. It is not a welcome move at a time when India is already progressing towards a GST (Goods and Services Tax) regime. Raw material prices, mainly cotton have doubled from a year ago. The retailers were contemplating price hikes of 10-15% to protect margins. With the new tax burden, retailers will be induced to increase prices further and the additional raise could be close to 5-7%.

    The rising prices of cotton could be taken care of by changing product mix or blends of the clothing fabrics. But excise duty hike will have to be passed on to the consumers. Is the Indian consumer ready to absorb such a hike? Well, that remains to be seen. We believe that the people will continue to spend on basic clothing, but may chose to defer their luxury and more discretionary purchases. The retailing companies thus will be affected negatively and the quantum of this impact will soon be evident.



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