Fashion in India to get expensive from Jan’22 as Govt hikes GST from 5% to 12%

In consonance with a notification issued by the Central Board of Indirect Taxes and Customs (CBIC) on November 18th, the union government has notified a uniform 12% GST rate for prices of both clothing and footwear effective from January 1st, 2022.

This rate rationalization came as an attempt to correct anomalies of the inverted duty structure. An inverted duty structure is a scenario in which the taxes on output or final products are lower than the taxes on individual inputs, creating an inverse accumulation of input tax credit which in most cases has to be refunded. Such taxation leads to a build-up of credits and cascading costs. It further leads to the accumulation of taxes at various stages of the manmade fibre (MMF) value chain and blockage of crucial working capital for the industry.

While the revised taxation policy primarily seeks to rectify the inverted duty structure for textiles and footwear under the Goods and Services Tax (GST) regime, it shall now also extend to a 12% rate for manmade fibre (MMF), yarn, fabrics, and apparels. At present, the tax rate exists at a 5% GST on fabrics, apparel, clothing, and footwear upto Rs.1000. Meanwhile, the GST rates for certain synthetic fibres and yarn have been decreased from 18 percent to 12 percent, in an attempt to bring uniformity of rates across the entire textiles sector. However, the reform tax scheme aims to do away with this price differentiation and levy a standard 12% rate on all manmade fibre, fabrics, yarn, and apparel. Simply stated, this is a direct hike on fabrics and apparel priced up to Rs.1000 from being subject to a rate of 5% to 12% GST.

It is particularly concerning that the pronouncement of this inflationary headwind will gradually flow over multiple products and merchandise in the textile industry including woven fabrics, synthetic yarn, pile fabrics, blankets, tents, accessories such as tablecloths, or serviettes, rugs, and tapestries to cite a few.  

This unilateral and arbitrary decision has been met with angry and disappointed concerns raised by both the Retailers Association of India(RAI) as well as the Clothing Manufacturers Association of India (CMAI). In a note to the Union Finance Minister, Nirmala Sitharaman, the RAI has contended clothing to be a basic need of an individual, a 12% on which is unjustified especially when the textile industry is the second-largest revenue-generating commodity in the economy. They further state that the new tax slab will adversely impact 85% of the industry while trying to ease and resolve a problem faced by less than 15% of the industry. The implications of this throttled tax can be anticipated to be major and far-reaching. On the business side, it will add to the financial burden of a post-pandemic already-stressed sector, slow down its pace of recovery, and affect working capital requirements especially in the case of Micro Small, and Medium Enterprises(MSME) businesses which account for 90% of the industry. On the consumer side, it will lead to a rise in the prices of garments, thereby hurting consumption. On the government side, in the long run, it may lead to many unorganized businesses fishing out of the GST net, thereby resulting in financial upheaval and stress.