The government stands to lose Rs 3,800 crore (Rs 38 billion) on account of the zero excise duty regime introduced in the textiles sector, but the loss will be more than offset by the consequent improvement in investment and employment opportunities in the sector, according to Textiles Minister Shankersinh Vaghela.

"We are aware that the zero duty regime will lead to a revenue loss of Rs 3,800 crore, but this is a small price to pay for the benefit of small textile units that have been freed from the inspector raj.

"The new tax structure will bring in more investment and generate more employment, production and more exports. We are estimating that foreign exchange earnings from textile exports will now double," Vaghela told Business Standard.

Criticising the previous government's attempts to introduce a uniform Cenvat chain in the textiles sector, the minister pointed out that the system was faulty as there were over 40 exemptions existing in the sector.

"The impact of the so-called Cenvat chain was that the inspector raj was still rampant and several small textile units were being unnecessarily harassed," Vaghela said.

He added that this could be one of the reasons behind the BJP's dismal performance in states like Tamil Nadu, Andhra Pradesh, Maharashtra and Gujarat.

The minister also justified the decision to maintain higher duty on man-made yarn and fibres.

"India has been a traditional grower of cotton and our cotton muslin has been world famous. Since most cotton growers and producers are in the small-scale sector they need encouragement. The demand to reduce excise duty on man-made fibre is being made by a small section of organised big players," he said.

The textile industry has been seeking rationalisation of the excise duty structure to reduce the disparity between excise duties on cotton and man-made fibres.

The Budget for 2004-05 has reduced the excise duty under the optional Cenvat route to 4 per cent on cotton yarn, fabrics, garments and made-ups, while man-made fibres have been put under a mandatory excise duty of 16 per cent and polyester filament yarn (including textured yarn) at 24 per cent.

Vaghela also pointed out that the government's decision to reduce import duty on several textile machinery to 5 per cent will help the textile sector upgrade its technology for the post-quota regime, which will become effective from January 1, 2005.

With the cut in import duty the Duty Entitlement Passbook Scheme rates for textile exporters will also come down.

Sectoral impact

• Import duty cut on textile machinery to help the sector upgrade technology
• With the cut in import duty, the DEPB rates for textile exporters will also come down
• Textile exports estimated at $3.5 bn in last fiscal

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