GST rate cut on apparel below ₹2,500 to boost sectoral revenue by 200 bps: Report

GST Rate Reduction: The recent rationalisation of the Goods and Service Tax (GST) by the Centre is expected to boost the revenue of India’s organised apparel retail sector by 200 basis points this fiscal, a new report has said.

According to the report by Crisil Ratings, the industry is likely to maintain a stready growth of 13 to 14 per cent in FY26 for the second straight year.

The GST Council, led by Finance Minister Nirmala Sitharaman, had last month rationalised the tax rates on apparel up to ₹2,500 to 5 per cent. Earlier, clothes below ₹1,000 had a 5 per cent GST, and those up to ₹2,500 were taxed at 12 per cent.

This rationalisation is expected to drive demand in the mid-premium segment, while the fast-fashion and value segments are projected to continue leading growth.

How will GST rate rationalisation affect apparel industry?

While the GST rate cut on apparel up to ₹2,500 will bring cheers to the mid-premium segment, the GST rate hike to 18 per cent on clothes above ₹2,500 has dampened demand in the premium segment.

Apparel including wedding wear, woollens, handlooms, and embroidered clothing have seen a slowing demand.

However, the impact of the GST rate hike is expected to be limited, with the premium segment contributing about 35 per cent of the gross revenues to the sector.

With nearly 65 per cent revenue coming from apparel priced under ₹2,500, gains in the mid and value segments are likely to offset softness at the higher end, the report noted.

“Extending the 5 per cent GST slab to apparel priced up to ₹2,500 boosts price competitiveness across the fast-fashion/value and mid-premium segments, whose customers are price-sensitive. With the timing of the GST rate cut coinciding with the festive season, demand should increase as middle-class spending picks up,” Crisil Ratings senior director Anuj Sethi said.

Factors such as lower inflation and fast fashion are also expected to aid to the revenue growth, he noted.

“Moreover, benign inflation, easing food cost and faster fashion-refresh cycles will help retailers gain a modest share-of-wallet advantage in discretionary categories, leading tosustained sectoral revenue growth of 13-14 per cent this fiscal,” the Crisil senior director said.

How will GST rate hike affect apparel sector?

The GST on apparel over ₹2,500 has been increased to 18 per cent, putting pressure on the premium segment. This came ahead of the festive and wedding season.

The Crisil report says that this could negatively impact the premium segment unless retailers choose to absorb some of the cost.

Buyers in the range of ₹2,500-3,500 will see most impact, with many customers in the bracket being expected to shift to the lower GST slab items that offer similar style and quality.

“Apparel retailers with a higher share of premium sales may choose to absorb part of the GST hike to sustain demand during the ongoing festive and wedding season, when buying activity is buoyant,” said poonam Updaydhay, Director of Crisil Ratings.

She further said that lower input cost could boost revenues as well.

“However, lower cotton prices and the reduction of GST on synthetic fibres and yarn, from 18 per cent and 12 per cent to a uniform 5 per cent, will ease input cost. As a result, given raw materials account for almost two-thirds of production cost, the sector’s operating margin is expected to inch up to 14.0-14.5 per cent this fiscal from 14 per cent last fiscal, even as marketing spending remains elevated amid intense competition across both the value and mid-premium segments,” Upadhyay added.

The rating agency added that overall, the GST revisions align with India’s evolving consumption dynamics, which are driven by rising middle-class incomes, urbanisation, and a visible shift towards affordable, fashion-forward clothing.