India’s textile and apparel sector may experience a temporary liquidity crunch following the shift to new Goods and Services Tax (GST) rates from 22nd September, as input tax credits (ITC) on older inventories risk being blocked due to the inverted duty structure (IDS). Tax experts warn that retailers could struggle to claim ITC on stock purchased at higher tax rates, creating short-term pressure on cash flows.
An IDS arises when the GST levied on inputs is higher than that on outputs. From 22nd September, textile, garment and apparel products priced below Rs. 2,500 (US $ 28) will attract 5% GST, reduced from 12%. As a result, inventories purchased earlier at the 12% rate may face IDS, preventing retailers from fully claiming ITC.
Ved Jain, past president of the Institute of Chartered Accountants of India (ICAI), cautioned that although the IDS has now been removed, retailers could still face delays in securing refunds. He said refunds might take one to two years to materialise, posing cash flow challenges in the interim.
Offering a more optimistic view, Rajat Mohan, senior partner at AMRG & Associates, explained that the impact would likely be modest. He noted that garment retailers typically operate at gross margins of 20–30%, with a substantial share of value addition coming from labour and allied costs, which will continue to generate fresh GST liabilities. Since inventory cycles in the sector generally last around 30 days, he estimated that the effective credit blockage would amount to only around 7% on one month’s stock, with normal operations enabling offset within a few months. He added that higher sales volumes following the GST cut would further speed up credit utilisation.
Sunil Jhunjhunwala, co-founder of sportswear firm Technosport, also downplayed the long-term impact, emphasising that GST itself is not a cost. He remarked that when input taxes exceed output taxes, the difference remains in the ledger as credit, and once purchases and sales align under the new regime, profits would follow.
However, Srikumar Krishnamurthy, senior vice president and co-group head of corporate ratings at ICRA Limited, warned that traders holding large inventories risk margin pressures if they fail to secure credit notes or supplier discounts to offset unclaimed credits.
This concern is especially acute in the garments sector, where higher stock levels are common. Durai Palanisamy, executive director of PALLAVAA Group, explained that traders in man-made fibres usually carry 15–30 days of stock, but garment traders often hold inventories purchased at the earlier 12% rate. He observed that it remains unclear how these costs will ultimately be passed on to consumers.
