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June 2, 2025

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How GST impacted the textile industry: Key changes and challenges

The textile industry is one of India's largest work providers, supporting both unqualified and unskilled workers. It also plays an important role in the country's economy, accounting for around 10% of annual exports. This post is expected to increase with the introduction of GST.

GST affects the entire cotton value chain and covers a variety of clothing, such as shirts, trousers, sarees, shoes, and more. Many small and medium-sized businesses (small and medium-sized businesses) prefer cotton-based textiles as they were previously freed from the central sales tax from the optional route.

However, GST changed its control structure and affected pricing, production, and general market dynamics. According to the Ministry of Textiles, the total Indian textile exports were $33.16 billion between 2011 and 2012, while the production of the textile machines was valued at 528 billion GBP. With GST, the industry saw both challenges and opportunities, and it influenced its growth and competitiveness.

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"Check the GST rate and HSN Code 5911 for textile products now!

Key Changes in the Textile Industry Post-GST

Implementing the Goods and Services Tax (GST) has caused major changes to the Indian textile industry. Here is a selective breakdown of these important changes.

1. Unified Control Structure: GST has replaced some indirect taxes, leading to an optimized uniform control system across the textile sector.

2. Input Tax Credit (ITC): The introduction of GST allowed textile manufacturers to claim input tax credits on raw materials, reducing the overall tax burden and promoting competitiveness.

3. Revised Tax Rates:

Man-Made Fibers: Subject to a 18% GST rate.

Cotton Fibers and Fabrics: Placed under 5% GST slab.

Readymade Garments: Taxed at 12% GST.

4. Impact on pricing: The revised GST rate has led to a change in the price structure, especially the affordable price of synthetic fibers and properties.

5. Cotton Production Current: The 5% GST on cotton products encourages farmers to expand cotton cultivation, boosting the overall cotton value chain.

6. Compliance Requirements: GST requires businesses to implement stricter compliance and document processes and must adapt to their systems for digital tax registration.

7. Impact on Employment: The transition to GST has had a different impact on employment within the textile sector, with some reports pointing to challenges in the labor-intensive segment.

8. Political Reform and Feedback in the Industry: The loose debate between industry and government interest groups has brought further reform considerations to address the challenges and possibilities of GST.

Challenges Faced by the Textile Industry Due to GST

The challenges of the textile industry have resulted in a significant change in the textile industry due to the implementation of the Goods and Services Tax (GST) in India. During the pursuit of taxation, several challenges emerged:

Reverse Taxation System: The textile sector faced an opposing service structure where GST is higher for the raw materials than the finished product. This inconsistency has increased manufacturing costs.

Compliance and Technical Challenges: The transition to the GST system has called for businesses to adapt to new compliance standards and digital tax registration systems. Many small and medium-sized businesses (small and medium-sized businesses) had to address these changes due to their limited technical infrastructure and expertise.

‍Impact on financial performance: Research shows that there is financial performance in key textile companies such as Raymond Ltd. There were no major improvements after the implementation of GST. This indicates that the expected benefits of GST are not uniformly uniform in the industry.

‍Considering the increase in GST rate: The proposed increase in GST clothing rate has sparked industry vigilance. Organizations such as the Confederation of Indian Textile Industry (CITI) have warned that such hikes could hurt demand, which could lead to potential job and financial stress for manufacturers.

Case Study: Raymond Ltd.

An analysis by Raymond Ltd., a well-known player in the textile area in India, showed that there were no big differences in financial performance before and after the putting into use of GST. The case highlights the challenges of changing to fit a new tax system without immediate financial benefits when it comes to changing to fit a new tax system

Taxation is simplified with GST, but the textile industry before the challenges related to service structure, compliance, and financial performance. It is important to counter assessments and guidelines to effectively tackle these issues.

GST Opportunities and Benefits for the Textile Sector

Simplified Tax Structure - GST replaced several indirect taxes, reduced compliance complexity, and promoted compliance.

Input Tax Credit (ITC) - Manufacturers can claim ITC for raw materials, reduce production costs, and increase profitability.

Boost to Exports – Zero-rated GST on exports enhances the global competitiveness of Indian textile products.

Reduction in Logistics Cost – Seamless interstate movement of goods under GST reduces transportation costs.

Growth of E-commerce in Textiles – A standardized tax system supports the expansion of online textile businesses.

Enhanced Government Revenue – Increased compliance and a broader tax base increases government revenue.

Formalization of Small Enterprises – Many unregistered textile businesses are now part of the formal economy, ensuring fair trade practices.

Encouragement for Investment – A structured tax regime attracts domestic and foreign investments into the textile sector.

Impact of GST on Small and Medium Textile Enterprises (SMEs)-

The impact of GST on compliance stress - SMEs had to adapt to strict compliance with digital tax registration and requirements. This was a challenge due to a lack of technical expertise.

Example: Many small fiber units in Surat had to deal with GST registration first, resulting in delays and penalties.

Cash Flow Issues – The inverted duty structure caused higher tax payments on raw materials, reducing cash liquidity for SMEs.
Example: Power loom units in Bhiwandi faced financial strain due to delays in GST refunds.

Formalization of Businesses – Many unregistered textile SMEs had to register under GST, increasing transparency but also bringing additional tax liabilities.

Impact on Pricing – Higher GST rates on synthetic fabrics (18%) made them expensive, affecting small-scale synthetic textile businesses.

‍Expansion of unit tax across the market: SMEs were able to sell themselves in the state without some tax restrictions.

‍Competing with large players - Established textile brands quickly adjusted, but SMEs had difficulty managing increased operating costs and price competition.

‍The advantages of GST's exports on export-oriented textile SME contributed to export-oriented textiles, improving profit margins and increasing global competitiveness.

‍Job Uncertainty: SMEs with no uncertainty in their jobs have reduced their labor force due to increased compliance costs.

Comparative Comparison of GST and post-scenarios in the textile industry

The introduction of GST has led to major changes in the textile industry, replacing some indirect taxes with uniform control systems. Although taxation has been simplified, it has also been a challenge for small and medium-sized businesses. Here, the comparison of the textile sector is before and after GST:

1. Tax Structure

Pre-GST: Several indirect taxes, such as VAT, sales tax, and service tax, were applied, leading to complex control systems.

GST Post: A single tax system that replaced all indirect taxes and promoted compliance.

2. Input Tax Credit (ITC)

Pre-GST: No ITC was available for certain raw materials, increasing production costs.

Post-GST, ITC is allowed, reducing the overall cost for manufacturers.

3. Export Benefits

Pre-GST: Exporters faced multiple tax barriers and delays in tax refunds.

Post-GST: Exports are zero-rated under GST, making refund claims faster and more efficient.

4. Impact on Small Businesses

Pre-GST: Many small textile businesses operated without tax registration, avoiding compliance costs.

Post-GST: SMEs will have to register under GST, increasing transparency but also compliance costs.

5. Logistics & Transportation

Pre-GST: Interstate movement of goods was costly due to state taxes and checkpoints.

Post-GST: The removal of checkpoints and multiple taxes has reduced transportation time and costs.

6. Pricing of Textiles

Pre-GST: Some textile products attracted zero or lower taxes, keeping prices low.

Post-GST: Higher tax rates on synthetic fabrics and garments increased costs for consumers.

Table: Pre-GST vs. Post-GST in the Textile Industry

Aspect	Pre-GST Scenario	Post-GST Scenario
Tax System	Multiple indirect taxes(VAT,Excise,Service tax)	Single unified tax GST
ITC	Limited availability, increased costs	Allowed on raw materials, reducing costs
Exports	Delays in refunds, multiple taxes	Zero-rated, faster refund process
SME Compliance	Many operated without tax registration	Mandatory registration leads to higher compliance
Logistics costs	High due to interstate taxes	Lower due to uniform taxes
Pricing costs	Some items had zero tax	Increased tax rates on synthetic fabrics

Conclusion

GST has changed India's textile industry by simplifying taxes, boosting clarity and transparency, and encouraging organized growth. While small businesses at first faced challenges, benefits like input tax credit and reduced logistics costs have improved overall productivity. With continued policy changes, the textile area can take advantage of GST for long-term growth and worldwide competitiveness.

FAQs

1. Can I claim input tax credit on raw textile materials under GST?

Yes, textile manufacturers can claim ITC on raw materials, reducing overall production costs.

2. Do I need GST registration for my small textile business?

If your turnover exceeds the threshold limit, GST registration is mandatory.

3. Does GST increase the cost of synthetic fabrics?

Yes, synthetic fabrics are taxed at 18%, making them more expensive compared to pre-GST rates.

4. Can I export textiles without paying GST?

Yes, textile exports are zero-rated under GST, allowing for tax-free exports with refund benefits.

5. Does GST reduce transportation costs for textile businesses?

Yes, GST removed interstate tax barriers, lowering logistics and transportation costs.

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