Arpita Singh
Student – M. Design – Accessories and Fashion
Renaissance University
Indore, Madhya Pradesh
Ananya Sharma
Assistant Professor ,
Renaissance University
Indore, Madhya Pradesh
Fashion is the bright, green, colourful canvas on which art meets utility and in the heart is the cloth, the warp and weft of India’s economic and cultural identity. It gives employment to millions, enables so many craftsmen and is a mighty ambassador brand India abroad. But for far too long, its expansion has been subtly hindered by tax complications, the most notorious of which is the infamous IDS (Inverted Duty Structure). As the pivotal GST 2.0 reforms come into force from September 22, 2025, we are watching for more than just a fiscal recalibration; for this seismic shift is set to transform the manner in which fabrics are made, priced and bought, and, ultimately, imagined. In the meantime, luxury consumers have been flocking to high-end retail stores and want to see if these reforms really will begin changing the game on luxury goods prices. Although the GST rates on items ranging from fancy watches to designer clothing and accessories haven’t been lowered — directly — industry pros are hinting at an indirect windfall: an increase in discretionary spending across the economy that could propel to another massive boom in the luxury market.
The Dual impact on fashion industry:
The new GST 2.0 actually has pulled the clothing industry very much down the middle. That’s a big win for budget-friendly fashion and makes those clothes much cheaper. But on the other hand, it’s making anything over the top or mid-range way more expensive.
The ₹2,500 Line in the Sand: Who Wins and Who Pays More Under GST 2.0?
GST 2.0 is transforming the Indian clothing in a big way. The market has sort of split into two paths for shoppers and businesses respectively. These reforms are not trivial tweaks; they have entrenched a sharp divide. On the one side, the changes are bringing clothing and shoes significantly down for the everyday, frugal shopper, creating a massive opportunity for that segment of the market. But the rules are making good, expensive garments in the premium and upper-mid-range much more expensive on the other side. This is forcing brands to seriously look at their business plans. Meanwhile, customers will have to spend more or even change what they buy.
The Value Segment: Getting Cheaper and Bigger
For the everyday shopper and the middle class, this is great news! The new rules cut taxes on many popular clothing items, making them more affordable:
| Item Price Range | GST 1.0 Rate (Old) | GST 2.0 Rate (New) | Price Change |
| Up to ₹1,000 | 5% | 5% | Stable |
| ₹1,000 to ₹2,500 | 12% | 5% | 7% Reduction (Significantly Cheaper) |
The Big Change: Under the old regime (GST 1.0), you paid 12 per cent tax on anything anywhere from ₹1,000 to ₹2,500. Now (GST 2.0) taxes that whole price range at the lowest 5 per cent rate.
The Impact: This 7 percentage point reduction in tax is a boon for the mid-range market of many garments. It’s likely to increase sales volume, as shoppers can now afford to purchase higher-quality or more products without breaking their budget.
The Premium Segment: Getting Costlier (The Losers)
If you shop for premium or designer clothes, especially those worn for special occasions, you’ll likely pay more due to a tax hike.
| Item Price Range | GST 1.0 Rate (Old) | GST 2.0 Rate (New) | Price Change |
| Above ₹2,500 | 12% | 18% | 6% Increase |
The Big Change: The tax on all clothes and shoes priced over ₹2,500 has risen from 12% to a flat 18%.
The Impact: This 6-percentage-point jump goes straight to the cost of luxury apparel, designer wear, and high-end ethnic clothing (wedding outfits). Buyers of the clothing segment in general (especially those spending just over ₹2,500, such as a pair of clothes costing ₹3,000 or ₹4,000 a piece) might now consider it too expensive to buy (and may resort to cheaper options or “trade down” to stay below the new ₹2,500 taxation threshold).
The Supply Chain Saviour: Fixing the textile Biggest Tax Problem
For manufacturers in the textile industry, the biggest and most exciting change is fixing a long-standing issue called the Inverted Duty Structure (IDS). This fix is a huge structural relief that solves major money problems and makes Indian textiles much stronger rivals globally.
What Was the Problem (IDS)
Imagine a tailor buying fabric (the raw material) and being charged a higher tax rate on the fabric than the tax rate they charge their customer for the finished shirt (the final product). This is the IDS.
The Old Way (GST 1.0): Manufacturers paid high tax (like 18% or 12%) on their inputs (Man-Made Fibre, Yarn). But when they sold the finished clothes, they charged low tax (like 5% or 12%).
The Consequence: The government owed the manufacturers money (refunds for the extra tax they paid upfront). This money, called Input Tax Credit (ITC), would get stuck or “blocked,” making it hard for businesses to manage their cash flow and crippling the ability of small businesses (MSMEs) to operate.
The New Solution (GST 2.0): Uniform 5% Tax
The government has completely flattened the tax structure for all synthetic materials to eliminate the IDS:
| Raw Material | GST 1.0 Rate (Old) | GST 2.0 Rate (New) | Key Impact |
| Man-Made Fibre (MMF) | 18% | 5% | Massive 13% Tax Cut |
| MMF Yarn | 12% | 5% | 7% Tax Cut |
The Impact: Making the tax rate uniform at 5% across the entire supply chain, manufacturers now pay the same low tax on their inputs as they charge on their final products. That immediately frees up working capital (the stuck money) and accelerates production.
Bonus for Exports: Since synthetic materials (MMF) are crucial for global textile exports, this tax reduction means Indian-made products are significantly cheaper and more competitive overseas.
Boost for Artisans: Traditional handmade goods, such as hand-embroidered shawls and carpets, have also been moved into the 5% tax bracket, providing financial relief and support to local cottage industries.
Taxing the Tycoons: The New Rules for Ultra-Luxury and High-End Splurges
GST 2.0 creates a special, very high tax bracket for the richest consumers, allowing most mid-range luxury items to remain stable or become slightly cheaper.
The Super-Luxury Tier: Welcome to the 40% Demerit Slab
The government has put a new, flat and massive tax rate into place on the absolute highest-end goods, or “demerit” goods.
Who is Affected: This 40% rate will hit the biggest toys, including super high-powered sports cars and SUVs (with over 1500cc engines), very large motorcycles (with over 350cc engines), private aircraft, and yachts.
The Big Twist: 40% sounds pretty great, yet the old system was a headache: 28 percent tax plus a “Compensation Cess” (an option that could include up to 22 percent added). Through the use of a crystal clear, single 40% rate replacing the complex ‘tax + cess,’ the total tax bill for most top-tier imports actually turned out to be simpler, more predictable and in some situations slightly cheaper on the buyer’s behalf. This clarity better positions high-ticket buyers and importers and allows them to plan.
Everyday & Investment Luxury: Stable Spending
For the rest of the luxury market—items that are expensive but not “super-luxury”—the rates remain mostly stable, or even drop in some key areas:
18% Standard Luxury: Items like premium watches, designer perfumes, and expensive hotel rooms (above ₹7,500/night) remain at the 18% GST rate. This stability means no sudden price hikes.
Bonus: Some high-end electronics like large-screen TVs and ACs have seen their tax rate cut from 28% down to 18%, making these lifestyle purchases cheaper.
3% Investment Luxury (Jewellery): The tax rate on gold, diamonds, and precious stones stays at a low 3%.
This confirms that the government sees jewellery as an investment asset, not just a high-consumption luxury item, keeping the barrier to investing low.
The GST 2.0 Scorecard: A Quick Look at the New Tax Reality
| Item Category | GST 1.0 Rate (Old) | GST 2.0 Rate (New) | Key Impact |
| Apparel/ Footwear (Up to ₹2,500) | 12% (₹1,000-₹2,500) | 5% | Significant Affordability . |
| Apparel/ Footwear (Above to ₹2,500) | 12% | 18% | Price Hike for Premium fashion. |
| Man-Made Fibre (MMF) | 18% | 5% | Corrects IDS; lower input costs; boosts export. |
| Luxury Cars (>1500cc) | 28%+22% Cess (Effective 50%) | 40% (No Cess) | Simplified Tax Structure may result in marginally lower effective price. |
| Luxury Watches/Perfume | 18% | 18% | No Direct Change; prices remain stable. |
Mission Accomplished: GST 2.0 Sets the Stage for Economic Equilibrium
GST 2.0 Forms the Stage for Economic Balance. GST 2.0 is a powerful fiscal tool in influencing economic production. In the fashion business, it provided critical assistance in repairing the Inverted Duty Structure (IDS) and giving the value category direct means to power up the goods category via lower taxes. The luxury part of the sector operates under a simpler, albeit elevated, tax system for super-luxury goods that allows for mid-level price stability. And yet here premium retailers must navigate the 6% rate increase as the general advantages – that the textile price-competitors category is doing better and a higher disposable income in the value arm will help boost consumer confidence and stability well into the future. The realization of these benefits hinges on manufacturers passing on input tax credit (ITC) savings and on how much the consumers adapt to the new pricing benchmarks
