The Punjab Government in its pre-poll budget (Assembly elections in Punjab expected in early 2017) has provided a partial rollback of VAT (value added tax) on cotton spinning. The new rate of VAT on cotton spinning will be 3.63% compared to the earlier 6.05%. Punjab has 165 spinning mills with 4.25 million active spindles and consume 6.5 lakh to 7 lakh cotton bales annually.

• Imports of cheaper cotton yarn by fabric and garmenting units (concentrated in Ludhiana and Gurgaon) in Punjab and Haryana from other parts of India had rendered the local spinning units uncompetitive in their own territory due to higher manufacturing cost.
• Due to high VAT, buying yarn from spinners in these states was costlier for these units compared to importing it from neighboring states.
• Punjab, Haryana being among major cotton producing states, the relief in VAT announced in past few days by both the states will now help ailing local spinning units.
• Going one step ahead of Punjab, the younger sibling Haryana has decided a zero rated VAT on cotton spinning in the state that is currently 5%.
• Haryana has an estimated 2.5 lakh spindles, which consume only lakh bales per annum against the production of 25 lakh cotton bales annually. So the state government is eyeing fresh investments by offering incentives to cotton spinning to enhance the consumption of cotton.
• DCM Textiles, SEL Manufacturing and HP Cotton Textiles Limited are the three large units in cotton spinning in Haryana.
• The decision of the state government will provide protection to the Punjab based spinning units against the cheap imports from other states which have lower cost of production.
• Most of the spinning mills have been under utilising their capacities for the past few years as there were no takers for the yarn produced at a higher price.
• The incentives offered by the emerging industrial hubs in states like Madhya Pradesh and Gujarat had curtailed the market of Punjab spinning sector in the past few years.
• The exporters will also get the benefit as they will have higher working capital at their disposal.
• A zero rated VAT would allow the units with twin advantage of tax waiver and input tax credit.