The textile and apparel sector may face a short-term liquidity crunch following the transition to new GST rates from September 22, as input tax credits (ITC) on old inventories could get blocked due to the inverted duty structure (IDS). Tax experts caution that claiming ITC on such inventories may be challenging for retailers, indirectly affecting their cash flows.
An inverted duty structure arises when the GST on inputs is higher than that on outputs. With effect from September 22, textile, garment, and apparel products priced below ₹2,500 attract 5% GST, down from 12%. This change means inventories purchased at the earlier 12% rate will face IDS, preventing retailers from fully claiming ITC.
Ved Jain, past president of the Institute of Chartered Accountants of India (ICAI), said: “Though the inverted duty structure has now been removed, traders will find it hard to claim ITC on their purchases, as tax authorities will not refund it easily. It might take one to two years for a full refund.”
However, Rajat Mohan, senior partner at AMRG & Associates, expects faster relief: “On average, garment retailers operate at gross margins of 20–30%, with a significant portion of value addition arising from labour and allied costs, on which fresh GST liability will naturally accrue. Further, inventory cycles in this sector are typically limited to about 30 days. Hence, even if the GST rate drops from 12% to 5%, the effective credit blockage will only be in the range of 7% on roughly one month’s stock, while ongoing value addition ensures higher tax offsets.”
According to him, the working capital impact will be temporary and limited in scale, and retailers should be able to absorb and neutralise the mismatch within a few months of normal operations. Increased sales volumes following the GST rate cut, he added, will accelerate credit utilisation and further shorten the adjustment period.
Sunil Jhunjhunwala, co-founder of sportswear company Technosport, said: “GST is not a cost. When a retailer pays higher input tax than output tax, the difference lies in the ledger as credit. Once GST on purchases and sales align, the retailer will see profits.”
He suggested that higher sales under the new regime would automatically offset the mismatch.
Still, some risks remain. Srikumar Krishnamurthy, senior vice president and co-group head, corporate ratings at ICRA Limited, noted that unclaimed input credits could squeeze margins for traders holding large inventories—unless they secure credit notes or discounts from suppliers.
The concern is particularly pronounced in garments, where traders typically maintain higher stock levels. Durai Palanisamy, executive director of PALLAVAA Group, explained:
“The problem is not so much in man-made fibres, where traders usually hold 15–30 days of stock. But in garments, traders may have invoiced at the 12% GST rate, and it is unclear how they will pass this on to end consumers.”