Border Adjustment Tax

Border Adjustment Tax:

The House Republican tax plan, under Trump’s presidency, proposes to change the US tax system, which include border adjustments that exempt exports but include imports in tax bills. Under the proposed border adjustment tax (BAT), the US companies would pay taxes on the goods imported creating higher taxes for imported products that are bought within America’s borders.

The BAT could be a potential barrier for any company to expand the business. Under the plan, companies wouldn’t be able to deduct the cost of imports from their revenue, a move that today enables them to lower their overall tax burden. At the same time, exports and other foreign sales would be made tax-free. The fashion and apparel industry survives by importing 98 percent of its products and this could be a death sentence for the industry. As the company is planning to source cotton fabric and also manufacturing of the garment, it would become an importer. With the border adjustment, the company’s imports will now be subject to tax which in all likelihood exceed the company’s profits.

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The tax is aimed at encouraging more manufacturing in the U.S. as well as raising government funds. Since exported items wouldn’t be taxed, the retailers would think of manufacturing the goods domestically.

While encouraging exports is a good idea, border adjustment tax could have an adverse effect on industries like fashion which are dependent on imports for components or manufactured goods. Businesses effected are left with no choices other than passing on the cost to consumers or start buying and manufacturing domestically. In an environment where consumers demand high quality, low priced products, either of the options are not feasible because of the out dated mills and high production costs of the US.

Being a small and upcoming company, one possible solution Poise has is to import the fabric and manufacture domestically. Sourcing the cotton fabric from a country like China or India would be inexpensive because both of them are the largest producers of cotton in the world. The company to meet its production/manufacturing requirements, can consider small domestic manufacturing units which would also provide job opportunities for many. Though the production costs are on a little higher side, this could be balanced by inexpensive imports. This also decreases the total border tax that is paid compared to the tax when both sourcing of material and manufacturing are considered.