Aiming to spur demand and counteract the unexpected wall of U.S. tariffs on India imposed last week, Prime Minister Narendra Modi recently announced relief for the country’s textile and apparel manufacturers. After a 10-hour sit-in by India‘s Goods and Service Tax (GST) Council, a simplification and reduction in tax slabs was announced late Wednesday.
The new rates, intended to streamline processes and compliance while easing the burden on consumers, include tax cuts on various items like apparel and footwear, and narrow down the four tax slabs introduced when GST first rolled out in 2017. Referred to as GST 2.0, the new regime will take effect on Sept. 22.
“The latest reforms mark a major simplification of the GST structure,” India’s Ministry of Finance said. “The shift to a two-slab system of 5 percent and 18 percent, removing the earlier 12 percent and 28 percent rates, will make taxation more transparent and easier to follow.”
“At the same time, a 40 percent on luxury and sin goods such as pan masala, tobacco, aerated drinks, high-end cars, yachts, and private aircraft ensures fairness and revenue balance. Alongside, registration and return filing have been simplified, refunds made faster, and compliance costs reduced, easing the burden on businesses, especially MSMEs and startups,” it added.
The ministry further highlighted that support for manufacturing would include a correction of “inverted duty structures, boosting domestic value addition and exports.”
“Without timely changes, we cannot give our country its rightful place in today’s global situation,” Modi said on Thursday, referring back to his Indian Independence Day speech last month and the promise he had made. “I had said from the Red Fort on 15 August this time that it is crucial to undertake next-generation reforms to make India self-reliant. I had also promised the countrymen that there would be a double blast of happiness before this Diwali,” he said.
Intended as both a mood lifter and financial relief, analysts noted that the timing was a strategic move after the 50 percent U.S. tariffs kicked in Aug. 27. Announced after months of speculation, the duties left India—once poised to enjoy the lowest tariff exposure in the region—facing the harshest penalties.
“It’s a big WOW for Indian citizens with the new GST reforms,” Sanjay K Jain, chairman of the Indian Chamber of Commerce National Textiles Committee, told Sourcing Journal. “This will have multiple effects, including lower inflation, higher disposable income for consumers, more demand, improved cashflow for business, less inverted duty issues.”
The reforms also cater to a longstanding industry demand to reduce taxes on man-made fibers so India can better compete with the global shift towards synthetics. “This has now been brought down to 5 percent, same as cotton. The use of manmade textiles is expected to increase, and the inverted duty on packaging boxes and cartons reduced from 12 percent to 5 percent,” Jain added.
Many exporters see this as an opportunity for India’s huge domestic market to help cushion the impact of global disruptions.
“It could be a lifeline,” observed Ramesh Durai, an exporter from the Tirupur. “The lower tax on raw materials and finished goods can make us more competitive for India, meanwhile, until things stabilize in the supply chain, as well as for export markets other than the U.S.”
“The government has accepted two major requests of the industry,” a spokesperson from Clothing Manufacturers Association of India (CMAI) explained. “The entire value chain from fiber on is now charged at one rate which is 5 percent, and adopting a fiber-neutral policy by equating the man-made fiber and cotton chains.”
Both apparel and footwear priced below 2,500 rupees ($28.34) will benefit, coming down to a tax slab of 5 percent for domestic sales. However, items above these price points will now face an 18 percent GST, up from 12 percent for apparel, while footwear above this price will continue under the 18 percent slab.
CMAI has urged the prime minister to reconsider this hike, emphasizing that a GST increase from 12 percent to 18 percent on higher-priced garments could have far-reaching consequences for both consumers and businesses in the apparel industry.
A spokesperson for the Retailers Association of India warned that the speed with which the informal sector had been formalized under GST could be undone. “Raising GST rates on apparel could encourage consumers to buy from the unorganized sector, undermining the formalization efforts made under the GST regime,” he said.
“Retailers will need to make strategic decisions on how to absorb costs, whether to pass them on to consumers, or how to adjust their product offerings to mitigate the impact of the increased tax,” he added.
Global brands and retailers are equally concerned. The higher GST on apparel valued at more than 2,500 rupees is expected to affect international chains such as H&M, Uniqlo and Zara.
“The GST slab changes would benefit value brands and specific products that are below 2,500 rupees, but the rate above that has been increased from 12 percent to 18 percent which may hit the sales of premium brands, including most international brands, by making them pricier unless they choose to absorb the impact partially or fully,” said Devangshu Datta, founder and chief executive of Third Eyesight, a specialist consulting firm focused on the consumer products and retail sector.
This comes at a time when most global brands have been looking at expansion plans for India, including upping their physical store presence as well as e-commerce efforts as consumption is expected to almost double from the present $2,000 per capita by 2030.
Indian retailers, however, have broadly welcomed the simplification of processes.
“The new GST regime as a transformative step,” said Isha Ambani, executive director of Reliance Retail Ventures Limited, adding that it would “bring relief to household budgets and simplify compliance for the industry,” creating a unique win–win for both consumers and businesses.
Reliance Retail is India’s largest retailer by revenue and store network, with more than 19,592 stores and a gross revenue of 3,308.7 million rupees ($37.51 billion).
“The GST rationalization marks a defining moment in India’s consumption journey. By reducing costs, keeping inflation in check, improving efficiency, and enabling greater scale, this will create opportunities for every stakeholder in the retail value chain including farmers, MSMEs, producers, suppliers, kiranas (small stores) and the end-consumers. Reliance Retail is committed to pass on the entire benefit of the new GST regime to customers from Day 1 across all its consumption baskets,” she said.
But does any of this ease the heavy blow dealt to manufacturers by U.S. tariffs?
“Not really,” said a manufacturer from Bangalore. “Many of our clients have frozen orders, and we are unsure about the way ahead. Domestic tax cuts cannot neutralize U.S. tariffs, but they can help us compete in categories using MMF. Athleisure and performance wear are huge markets, and we might find ways to absorb the shock.”
Industry experts noted that the timing and speed of the move, which reduces compliance burdens, accelerates export refunds within seven days, and cleares refunds stuck under the inverted duty structure, could make the difference between survival and collapse for smaller exporters, giving them at least a fighting chance.