With just three months left for scrapping of textile quotas in the global market, the finance ministry has provided a key relief to export oriented units (EOUs) in the textile sector.

These units have been allowed to sell fabrics in the domestic market by paying much lower excise duty than the previous level of 12.3%. The excise duty applicable on the fabrics supplied by EOUs in the domestic market will now be in the range of 4% to 8%, industry sources said. The revenue department has issued a notification to this effect, they added.

Since textiles have been taken out of the Cenvat chain, most units were opting to supply fabrics in the domestic market without paying excise. This rendered fabrics supplied by EOUs uncompetitive in the domestic market, bringing the domestic market business of EOUs to a virtual halt.

The current duty relief will partially restore parity and enable EOUs to access the domestic market when the going gets tough in the international market, the sources added.

Textile EOUs are allowed to sell fabrics and yarn in the domestic market and their entitlement has been fixed at 50% of their exports. However, the excise duty they have to pay on domestic market supplies is 50% of the normal customs duty which now stands at 24%.

Along with the 2% education cess, the excise burden on fabrics supplied by EOUs was working out to 12.3%, hurting this segment which had grown over the years into a major supplier of fabrics and yarn to the domestic market.

In the 2004-05 budget, the government had provided an option for textile units to stay out of the Cenvat chain. Accordingly, textile units can either pay excise duty, allowing users of yarn and fabrics to claim credit.

The other option is to clear yarn and fabrics without paying excise. In case the second option is exercised, duty credit will not be available to buyers. Most units in the domestic market are opting not to pay excise, sources said. As a result, EOUs were being priced out. Buyers were seeking huge discounts to balance the tax as they had the option to buy from domestic units.

The relief provided by the finance ministry, however, is partial for EOUs as they still have to pay stiff duty on yarn. The reduction in duty is only in the case of fabrics, sources said. Textile EOUs face a duty disadvantage of 4.1% in the case of cotton yarn and large volume of business is shifting to domestic units.

A number of organisations, including the Export Promotion Council (EPC) for EOUs and special economic zones (SEZs) as well as Confederation of Export Units (CEU), are now pressing for duty relief to EOUs on yarn too.

Access to the domestic market is necessary for EOUs to balance the fluctuations in the international market. Moreover, rejects and surplus have to be sold in the domestic market. Hence the demand for duty relief to EOUs on yarn too, sources said. The commerce department and the textile ministry are also supporting the demand.

The partial duty relief provided by the finance ministry would benefit a large number of companies including Vardhman Spinning, Century, Nahar, Ginni, Maral Overseas and GTN Textiles. EOUs exported cotton yearn worth more than Rs 6,000 crore last year, accounting for nearly 50% of the shipments from the country. The units have a large share of the domestic market, both in the case of yarn as well as fabrics.