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GST 2.0 Reforms: What the Indian Apparel Industry Had Hoped for and What Really Happened?

Amit

September 4, 2025

The textile and apparel industry has always been the backbone of India's economy. It maintains domestic consumption, enhances exports, and provides employment to millions of individuals. Industry members were optimistic that their long-standing issues would now be resolved as the 56th GST Council meeting (September 2025) brought in the biggest tax reforms since the launch of GST in 2017.

The stakeholders pinned very high expectations on everything ranging from safeguarding artisans to rectifying the inverted duty structure (IDS). Did the apparel industry, however, get what it required from the new GST 2.0 reforms in 2025? Let us state it in plain, human terms that every retailer, producer, and consumer can comprehend.

What the Clothes Industry Asked

Problems of the textile sector have long been expressed by bodies such as CMAI and CITI. The expectations were pragmatic and arose out of cash flow, compliance, and competitiveness concerns.

Uniform 5% GST along the value chain: Since fibre, yarn, and fabric were taxed more than finished apparel, working capital was hindered.
Higher threshold for clothing slabs: The ₹1,000 limit blended luxury and middle-class apparel. The sector asked that it be increased to ₹10,000.
Simple compliance: Filing ITC-04 was drowning small job-work units. There was a pressing need for relief.
Artisan protection: Even though they were not luxury items, traditional sarees, lehengas, and handloom wear often crossed the ₹2,500 mark.
The objective was clear: Make GST inclusive, encouraging, and growth-facilitating for India's most labour-intensive industry.

Major Relief on Inputs

Manufactured yarn came down from 12% to 5%, and Human-made fibers came down from 18% to 5%. The manufacturers enjoyed major relief on working capital due to this ultimate correction to the inverted duty regime.

Increased Range of Inexpensive Apparel

Instead of ₹1,000, the 5% GST bracket now extends to ₹2,500. This is a huge victory for everyday wear and low-cost fashion.

Penalized Artisan & Mid-Range

Clothing GST was previously 12%, but it is now 18% for anything over ₹2,500. The price of artisan handloom goods, jackets, kurtas, and sarees all increased overnight.

Absence of Compliance Relief

Small-scale businesses are still burdened by the dreaded ITC-04 filing, which has not changed.

Side Benefits of the Reforms

Surprisingly, the GST 2.0 reforms also make indirect benefits for the clothing sector:

Insurance is less expensive: Life and medical insurance are GST-exempted, which means families have more spare cash for lifestyle items, including garments.

Daily essentials are less expensive: Soap, shampoo, and food experienced rate reductions. What they save here could translate into discretionary fashion expenses.

Luxury products isolated: A new 40% luxury/sin goods slab means apparel is comfortably outside this band — a relief for mid-market retailers.

Winners and Losers of the New GST Era

Winners

Budget clothing manufacturers: Fashion priced between ₹1,000–₹2,500 is now more affordable. This segment will experience volume growth.
Artificial fibre manufacturers: Lower duties put them at par with cotton.
Exporters: Lower input costs translate into quick refunds and improved international competitiveness.

Losers

Artisan and mid-range wear: Sarees, lehengas, and jackets that cost over ₹2,500 attract a steeper GST. This will impact cultural heritage as well as middle-class affordability.
Mid-tier market retailers: Businesses in the ₹2,500–₹5,000 bracket might experience demand slackening.
Small job-work units: Ongoing ITC-04 compliance causes angst.

Implications for Companies

(a) Relief from Working Capital:
The cash flow has the largest gain. ITC blocked because of inverted duty has stopped. Input/output credits can be seamlessly aligned by manufacturers.

(b) The Pricing Strategy Must Be Modified
• Goods priced between ₹1,000 and ₹2,500 start to compete more.
• However, in order to remain competitive under 18% GST, companies with prices above ₹2,500 must rethink their pricing, offer discounts, or redesign their SKUs.
(c) Stock management:

If you had a lot of clothing in stock that was only slightly over ₹2,500, your working capital outflow increased. Astute competitors might begin re-engineering SKUs to remain in the ₹2,500 range for mass markets.

(d) Competitiveness in Exporting
Indian clothing can command a higher price in international markets thanks to MMF and yarn at 5%, which is advantageous for major exporters.

The Gap Between Demand and Delivery

And how did the Council's decision compare to the industry's wish list?

Industry Demand	What happened	Verdict
Uniform 5% across fibre-to-garment	Inputs cut to 5%, but garments over ₹2,500 charged 18%	Partial win
Threshold to ₹10,000	Increased only to ₹2,500	Partial, much less than ask
Remove ITC-04	No change	Miss
Protect artisan traditional wear	Garments over ₹2,500 charged more	Miss

Bottom line: The government resolved the inverted duty mess and expanded the affordability zone, but fell short of a complete uniform 5% framework or substantive relief for artisan/mid-range categories.

What Businesses Need to Do Now

The GST reforms of 2025 need businesses to revisit their pricing, inventory, and approach.

Re-engineer price: Goods at about ₹2,500 will require repackaging, bundling, or SKU redesigning to stay appealing.
Go for budget fashion: The ₹1,000–₹2,500 segment will be the growth leader. Brands targeting here will emerge winners.
Drive stock smartly: Products priced just over ₹2,500 might require discounts or reorganization to stay free of cash flow problems.
Tap export potential: At 5% input cost, Indian exporters can gain lost territory overseas.

Conclusion

The September 2025 GST overhaul is a milestone for the tax system of India.

Partial win for the textile and clothing industry is:

• Fabulous win on input taxes and mass-market apparel.

• Fabulous miss on artisanal wear and compliance relief.

The message is unmistakable: the government is eager to increase affordability for mass-market wear while reserving higher-end segments as paymasters.

For companies, the game now is flexibility — price sensibly, handling inventory, and using the input credit relief to expand.

So that this does not end up confusing anyone, here's a side-by-side analysis of how GST rates on various categories of clothing have changed after the September 2025 reforms. The above table presents the old rates versus new rates along with a brief note on the real-world implication for companies and shoppers.

Need Professional Advice?

Feel free to get in touch with us if you would like advice on anything pertaining to GST reforms, clothing taxation, or compliance tactics. We can guide you through the changes and develop a strategy that meets your company's requirements.

Disclaimer

This blog is for general information only. It contains general industry developments and analysis up to September 2025. It must not be considered professional tax or legal guidance. Organizations should approach their accountants, GST practitioners, or financial advisors for personalized advice.