India's Goods and Services Tax (GST) Council plans to evaluate a proposal to implement a uniform 12 per cent GST across the entire textile value chain. Expected to be discussed before September as part of the next phase of GST reforms, this reform aims to correct the long-standing inverted duty structure that has plagued the sector, as per a report by Moneycontrol.

Likely to be part of the Group of Ministers' (GoM) rate rationalization report, the proposal is being supported by the Centre. Currently, cotton is taxed at 5 per cent, yarn at 12 per cent, and synthetic fibers and their chemicals at 18 per cent. Additionally, garments priced below Rs 2,000 attract a 5 per cent GST, while those above Rs 2,000 are taxed at 12 per cent.

The proposal is to bring everything to 12 percent. The lower 5 per cent GST on cotton was originally intended to benefit farmers and keep raw materials affordable, given its status as a primary agricultural commodity. However, this rate mismatch has led to working capital getting stuck in refund claims, distorted pricing, and disincentives for investment.

The proposed reform may also eliminate the price threshold on garments, applying a flat 12 per cent rate irrespective of value for simplification.

The current rate structure not only distorts pricing but also impacts cash flow due to reliance on inverted duty refunds, which the government aims to limit. This move is part of a broader effort to streamline the GST framework, reduce hidden costs, and enhance the global competitiveness of India’s textile industry. A uniform rate is expected to simplify compliance, reduce reliance on refunds, and potentially attract new capital into textile manufacturing, particularly benefiting the synthetic segment which currently faces heavier taxation despite its mass consumption.