Decoding GST for Clothing Industry in India: A Practical & Legal Insight

India’s apparel sector, from handcrafted boutiques to large garment manufacturers and booming online fashion sellers, is experiencing a transformation driven by the Goods and Services Tax (GST). With evolving tax rates, digitized compliance mechanisms, and increased Departmental scrutiny, stakeholders in the clothing industry—from manufacturers and wholesalers to Instagram sellers and e-commerce players—must understand how GST affects pricing, compliance, input credits, and supply chains.

1. Understanding GST Rates on Apparel: Stitching the Basics

Under GST, garments and apparel fall under Chapters 61 (knitted or crocheted) and 62 (non-knitted) of the Customs Tariff Act, 1975. The applicable GST rate is driven by the value of the individual item, not the invoice total.

Example (1) : If a retailer sells 10 shirts worth ₹950 each, GST is charged @5% per shirt, even if the total invoice exceeds ₹10,000.

Example (2) : A wholesaler sells 5 designer kurtas, each priced at ₹1,200. Even though the total invoice value is ₹6,000, since each kurta is individually priced above ₹1,000, the applicable GST rate is 12% on each piece.

Example (3) : A fashion boutique sells the following items in one invoice:

• 1 top @ ₹800
• 1 jeans @ ₹1,200
• 1 dress @ ₹999

Now, the GST rate will be:

• Top – ₹800 → 5%
• Jeans – ₹1,200 → 12%
• Dress – ₹999 → 5%

Conclusion: Each item is assessed individually for GST rate applicability, even if all are part of the same bill.

2. GST Registration Requirements: Manufacturer vs Trader

(A) Manufacturer of Garments

• Threshold: ₹40 lakhs for goods (Sec 22, CGST Act).
• Compulsory Registration:
  • If inter-state supplies are made (Sec 24(i)).
  • If selling via E-commerce Operator (ECO) (Sec 24(ix)).
• Can claim full ITC on raw materials, capital goods, packaging inputs, etc.

Note: A manufacturer cannot opt for the Composition Scheme under Sec 10 if engaged in inter-state supply or selling through an e-commerce platform.

(B) Trader / Retailer

• Threshold: ₹40 lakhs.
• Eligible for Composition Scheme (up to ₹1.5 crore) @1% tax, but without ITC.
• Ineligible for Composition Scheme if selling online or making inter-state supplies.

3. Sales via E-Commerce Platforms (ECOs): A Compliance-Heavy Model

Selling via platforms like Amazon, Flipkart, Myntra comes with stringent GST rules.

• Compulsory GST Registration: Regardless of turnover [Sec 24(ix)].
• TCS (Tax Collected at Source) by ECO @1% on net taxable value [Sec 52, CGST Act].
• Seller receives tax-collected summary via Form GSTR-8 (filed by ECO).
• Seller must reconcile GSTR-2A/2B to claim correct ITC.

4. Sales via Own Website, WhatsApp, or Instagram: Lesser Regulation but Strategic Risk

If an entity sells directly to customers via their own website, Instagram store, or WhatsApp, and not through ECOs:

• Threshold limit of ₹40 lakhs applies (for goods).
• No TCS compliance.
• Mandatory registration if inter-state supply is made [Sec 24(i)].
• Payment gateways (Razorpay, PayU) may still request GSTIN for onboarding.

Caution: Even without an ECO, inter-state supply of goods requires registration regardless of turnover. No relaxation like in the case of services.

5. Input Tax Credit (ITC): Claim Smart, Stay Compliant

For Manufacturers:

Eligible to claim ITC on:

• Fabrics, buttons, threads
• Machinery (capital goods)
• Dyeing & embroidery services
• Packaging material
• Job work charges

Capital Goods ITC also allowed, unless used for exempted goods.

For Traders/Retailers:

Eligible to claim ITC on:

• Purchase of garments from registered suppliers
• Branding, warehouse rent, advertisement
• Logistics (if supplier charges GST)

No ITC on:

• Goods purchased from unregistered persons (unless RCM paid).
• Personal consumption.
• ITC is blocked on canteen, gifts, personal use [Sec 17(5)].

6. Job Work & the Garment Supply Chain: Seamless or Taxable?

Many brands outsource stitching to job workers or small units. Under Section 143 of CGST Act:

• No GST when inputs sent to job worker under delivery challan.
• Must return processed goods within:
  • 1 year (inputs)
  • 3 years (capital goods)
• Principal (brand owner) can claim ITC on raw materials dispatched to job worker.

Exemption from registration available to job worker if:

• Working exclusively for one principal,
• Within turnover limit, and
• Supplies goods only under delivery challans.

7. Inverted Duty Refund: When Input Tax Exceeds Output Tax

A major challenge in clothing lies in Inverted Duty Structure, where inputs like fabric attract 12%, while finished goods are taxed at 5%.

Solution: Refund of Unutilized ITC under Section 54(3).

• Refund filed via Form RFD-01 on GST portal.
• Only ITC on inputs (not input services or capital goods) is eligible.
• Rule 89(5) formula must be followed.

8. Impact of Branding, Labels, and Bundling

• No distinction now between branded/unbranded clothing (earlier taxed differently).
• Branding activities (e.g., logo printing, marketing) attract 18% GST.
• Bundling products (e.g., shirt + tie combo) must follow mixed/single supply rules under Sec 8 of CGST Act.

Tip: Classify carefully to avoid tax disputes on bundled or promotional packs.

9. Handling Discounts, Sales Returns & Credit Notes

Discounts

• Pre-supply discounts (invoice-level): Deductible from transaction value.
• Post-supply discounts (seasonal, performance-based):
  • Deductible only if:
    • Established in contract (Sec 15(3)(b)),
    • Linked to specific invoices, and
    • Buyer reverses ITC proportionately.

Sales Returns

• Credit Notes to be issued under Sec 34.
• Must be adjusted by 30th November of following FY or before annual return (whichever is earlier).

Example: If ₹20,000 worth of shirts are returned in June 2025 (sold in Dec 2024), credit note must be issued by 30th Nov 2025.

10. Documentation, Audit, and Compliance Requirements

Forms to be filed:

• Audit under Section 35(5) is now removed (post Budget 2021), but reconciliation in GSTR-9C remains mandatory if turnover exceeds ₹5 crore.
• Maintain detailed stock register, purchase bills, job work challans, and tax invoices for 6 years (Sec 36).

Conclusion: Garment Industry Must Stitch Strategy with Compliance

The Indian clothing industry, with its vast unorganized and organized segments, must navigate through a multi-threaded GST landscape. A misstep in classification, registration, or ITC claim can trigger audit flags or departmental notices.

Proactive GST compliance, timely reconciliation, and process documentation can make the difference between operational ease and legal entanglement. Whether you’re a Delhi-based D2C apparel brand or a Ludhiana-based hosiery manufacturer, the rules of the game remain the same—know the law, document your actions, and stay updated with notifications and circulars.

GST on Clothing Industry – Practical Q&A

Q1: I run a boutique and sell unbranded kurtis for ₹850 each. My annual turnover is ₹22 lakhs. Do I need GST registration?

A: No, GST registration is not required until your turnover exceeds ₹40 lakhs (for goods) under Section 22 of CGST Act, provided:

• You sell intra-state only
• You do not sell via e-commerce (Amazon, Flipkart, etc.)

Reference: Sec 22(1), CGST Act, 2017

Q2: I sell on Amazon and Flipkart. My turnover is just ₹6 lakhs. Do I still need to register under GST?

A: Yes, mandatory registration is required regardless of turnover if you sell through an E-commerce Operator (ECO) as per Section 24(ix) of CGST Act.

Also Note: Amazon/Flipkart will deduct TCS @ 1% under Section 52 and file Form GSTR-8.

Q3: I manufacture shirts using fabrics and outsource stitching to a job worker. Can I claim ITC on fabric and transport charges?

A: Yes, as a manufacturer, you can claim ITC on:

• Purchase of fabric (inputs)
• Transportation (input service)
• Even if the processing is outsourced, as long as goods are returned within 1 year under Section 143 of CGST Act.

Job worker does not need registration if working under challan and within threshold

Q4: I sell a combo pack of T-shirt + cap for ₹1,100. What GST rate applies?

A: Depends on whether it is a:

• Mixed Supply (Sec 8(b)) → Highest tax rate applies (e.g., 12%)
• Composite Supply (Sec 8(a)) → Tax rate of principal supply (e.g., if T-shirt is main item @5%)

Careful structuring and documentation is required to justify treatment.

Q5: My supplier charged me 12% GST on fabric, but I sell finished garments at 5%. Can I claim refund of the difference?

A: Yes, you are eligible for Inverted Duty Refund under Section 54(3) of CGST Act.

• Claim via Form RFD-01
• Refund allowed on inputs only (not services or capital goods) [Rule 89(5)]

Q6: I sell shirts worth ₹900 each and jeans worth ₹1,200 in a single invoice. Which rate applies?

A: Each item is taxed individually based on its value:

• Shirt @ ₹900 → 5% GST
• Jeans @ ₹1,200 → 12% GST

Q7: A customer returned 2 kurtis sold in November 2024. Can I issue a credit note in July 2025?

A: Yes, but only if the credit note is issued by 30th November 2025, or before filing the annual return for FY 2024-25, whichever is earlier [Section 34(2), CGST Act].

Q8: Can a fashion retailer opt for the Composition Scheme?

A: Yes, if:

• Turnover < ₹1.5 crore
• No inter-state supply
• Not selling via e-commerce
• Sells goods only within state

Tax rate: 1% (0.5% CGST + 0.5% SGST) on turnover [Section 10].

No ITC is available under this scheme.

Q9: I’m selling clothes via Instagram and WhatsApp using my own website. Is registration compulsory?

A: Registration is not compulsory until turnover crosses ₹40 lakhs, provided:

• You are not selling inter-state
• You are not using ECO platforms

But if you start shipping out-of-state, registration becomes mandatory under Section 24(i).

Q10: What are common compliance mistakes made in the apparel business?

A:

1.Ignoring mandatory registration for ECO sales

2. Charging uniform GST rate for mixed invoices (instead of per item)

3. Missing refund timelines for inverted duty structure

4. Failing to issue credit notes within time limits

5. Treating combo supplies wrongly as composite instead of mixed