A proposal to introduce a uniform 12 percent Goods and Services Tax (GST) across the textile value chain may be taken up by the GST Council before September as part of the next phase of GST reforms, a senior government source told Moneycontrol.
The plan, which may form part of the Group of Ministers’ (GoM) rate rationalisation report, is said to be backed by the Centre. It seeks to correct the inverted duty structure that has long affected the sector. Currently, cotton is taxed at 5 percent, yarn at 12 percent, and synthetic fibres and the chemicals used to make them at 18 percent. 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 said.
“These issues are kind of… whatever decision probably happens more or less by September,” he added.
Farm produce logic
The rationale behind levying a lower 5 percent GST on cotton stems from the fact that it is a primary agricultural commodity. In India’s GST framework, farm produce and agricultural inputs are typically taxed at lower rates (often 0 or 5 percent) to keep food and fibre affordable, avoid taxing farmers, and promote agro-processing. Cotton, being a farm output, was thus taxed at 5 percent under the assumption that it would benefit the farming community and keep basic textile raw materials inexpensive.
However, this rate mismatch has created an inverted duty structure, which leads to working capital getting stuck in refund claims, distorted pricing across the value chain, and disincentives for investment.
Garment threshold
The proposal may also include removing the price threshold on garments and applying a flat 12 percent rate across all products, regardless of 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 added.
The current rate structure not only distorts pricing but also affects working capital flows due to reliance on inverted duty refunds, which the government is now looking 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 said.
Mass consumption
Synthetic products, which account for a large share of mass consumption, are taxed more heavily at present – despite their growing relevance in the Indian textile mix.
“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 noted.
The source outlined the entire synthetic value chain. “Chemicals are at 18 percent, their fibre 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.”
The move is part of a broader attempt to streamline the GST structure, reduce hidden costs, and improve the global competitiveness of India’s textile industry.
The textile industry has long flagged concerns over the inverted duty structure, especially in the synthetic segment, which has deterred investment and hurt export competitiveness. A uniform rate, if implemented, would simplify compliance, reduce refund dependency, and potentially attract new capital into textile manufacturing.
