Tatsat Chronicle Magazine

GST: Clothes and footwear may become more expensive starting in January

October 6, 2021

The GST Council announced on September 17 that, as of January 1, the duty inversion on textiles and footwear will be corrected

According to two persons familiar with the matter who asked to remain anonymous, clothing and footwear may become more expensive starting January 1 as plans are in the works to raise GST (goods and services tax) on them from 5% to 12% to fix the existing inverted duty structure. The GST Council declared on September 17 that, beginning January 1, it would remedy the duty inversion on textiles and footwear value chains, although it did not specify the tax rates. Higher duty on raw materials compared to finished goods creates an inverted tax structure, making it difficult for producers to collect ITC (input tax credit), and the burden is ultimately passed on to consumers.

To avoid tax cascading and to reduce the tax burden, a GST-registered business can claim all levies already paid on inputs to make a product, deliver a service, or both, before making a final sale via the ITC system. According to the sources cited above, a 12 percent GST rate is being considered for the majority of products in the two divisions – textiles and footwear – which would effectively remedy duty inversions and allow producers to claim the entire input tax credit (ITC).

“Because manufacturers are anticipated to pass on the ITC benefit to consumers, the impact of increased tax on the ultimate price will be minimal,” one of them said, adding that the Council will make the final decision on the topic. In response to an email inquiry, the Union Finance Ministry did not react. According to the second person, the GST Council, which is the final authority on this matter, the dual rate structure—12% for the majority of apparel and footwear aimed at the masses and 18% for higher-value products aimed at wealthy customers (especially in the case of footwear)—could be maintained for social equity. At the moment, apparels costing less than $1,000 are subject to a 5% GST, while garments costing more than $1,000 are subject to a 12 percent tax.