Proposal for Uniform 12% GST Across Textile Value Chain
A proposal to implement a uniform 12 percent Goods and Services Tax (GST) across the textile value chain may be considered by the GST Council before September as part of the next phase of GST reforms, according to a senior government source speaking to Moneycontrol.
This initiative, which may be included in the Group of Ministers’ (GoM) rate rationalization report, is reportedly supported by the Centre. The plan aims to address the longstanding inverted duty structure that has adversely impacted the textile sector. Currently, cotton is subject to a 5 percent tax, yarn to 12 percent, and synthetic fibers, along with the chemicals used in their production, are taxed at 18 percent. Additionally, garments priced below Rs 2,000 attract a 5 percent GST, while those priced above Rs 2,000 are taxed at 12 percent.
“Correction of textile inverted duty is pending. Cotton is at 5 percent – it’s a farm produce logic, but it is not working. It is no longer delivering the intended benefit in the context of GST. Yarn is at 12 percent. The proposal is to bring everything to 12 percent,” the source stated. “These issues are kind of… whatever decision probably happens more or less by September,” the source added.
Farm Produce Logic
The rationale for the lower GST on cotton stems from its status as a primary agricultural commodity. Under India’s GST framework, farm produce and agricultural inputs are typically taxed at lower rates (often 0 or 5 percent) to maintain affordability of food and fiber, avoid taxing farmers, and encourage agro-processing. The 5 percent tax on cotton was intended to benefit the farming community and keep essential textile raw materials cost-effective. However, this rate mismatch has led to an inverted duty structure, resulting in working capital being tied up in refund claims, distorted pricing throughout the value chain, and disincentives for investment.
Garment Threshold
The proposal may also contemplate eliminating the price threshold for garments, thereby applying a flat 12 percent rate across all products, regardless of their value. “Garments up to Rs 2,000, a threshold is there. Make everything at 12 percent irrespective of any threshold for simplification, it may be proposed. As it is, it’s not a levy on the farmers; it is a levy on the buyer,” the source elaborated.
The current rate structure distorts pricing and affects working capital flows due to dependence on inverted duty refunds, which the government aims to limit. “If inversion is there, investments will not come. Inverted duty refund should be stopped… working capital is used. Overall, it pushes the price up. It’s a cleaner design – don’t distort the rate structure,” the source emphasized.
Mass Consumption
Synthetic products, which represent a significant portion of mass consumption, are currently taxed at higher rates—despite their increasing relevance in the Indian textile landscape. “If at all we have to put the burden on the user, then there is a need to reduce the rate on polyesters and synthetics. That is what is used by the masses. Then they blend it with cotton. That is how the chain is. But the rate structure is reverse,” the source pointed out.
The source outlined the entire synthetic value chain: “Chemicals are at 18 percent, their fiber is at 18 percent, and yarn is at 12 percent. So across, the proposal is likely to be for a 12 percent rate. We need to clean up – else there are hidden costs. Money gets stuck. Industry also is not able to compete.”
This move represents a broader effort to streamline the GST structure, reduce hidden costs, and enhance the global competitiveness of India’s textile industry. The textile sector has consistently raised concerns regarding the inverted duty structure, particularly in the synthetic segment, which has hindered investments and negatively impacted export competitiveness. A uniform rate, if enacted, could simplify compliance, diminish reliance on refunds, and potentially attract new investments in textile manufacturing.
