By Dr. Samar Verma*
Disadvantage is often the most potent source of competitive advantage. Fibre neutrality has sat on India’s textile reform agenda for decades. Yet its moment has arrived only now, propelled by a hard external shove: the latest “Trump tariff” salvos on apparel reshaped sourcing math so sharply that, to borrow Milton Friedman’s line, what was once “politically impossible” became “politically inevitable.” In that light, the GST Council’s decision to neutralise taxes across fibres is not just a rate cut; it is a strategy, a structural shift, easing industry response in the face of unprecedented external challenge.
For years, India’s tax code quietly leaned toward cotton. Man-made fibres (MMF) paid more tax upstream—18% on fibre, 12% on yarn—while fabrics and most garments sat at 5%. The result was an inverted duty structure that trapped working capital, discouraged MMF capacity, and pulled investment away from the product lines the world actually buys. The 56th GST Council meeting has now corrected this: MMF fibre drops to 5% (from 18%) and MMF yarn to 5% (from 12%), effective September 22, 2025. Simultaneously, garments up to ₹2,500 shift into the 5% slab; items above ₹2,500 will attract 18%. Together, these moves deliver the long-promised “fibre neutrality.”
Fibre neutrality is simple in principle: the tax system should not decide which fibre wins. A neutral rate across cotton, MMF and blends lets mills choose inputs based on price, performance and market demand, not on tax arbitrage. Trade outlets and associations have spent years documenting how the old ladder—18/12/5 for MMF—distorted the chain; the GST Council’s move is therefore more than a rate tweak; it’s a structural reset.
Why now? Two forces converged. First, the policy window finally opened to prune slabs to two principal rates (5% and 18%) and fix long-pending inversions. Second, exporters face a tougher world: tariff volatility in the United States—most recently tariff salvos under President Donald Trump—has scrambled sourcing and pricing. In such conditions, neutral input taxes are a practical competitiveness hedge amid global headwinds and liquidity relief for MSMEs in synthetics.
The global demand context is unambiguous. MMFs dominate world fibre consumption, and India’s domestic usage is still cotton-heavy relative to peers. Synthetics have continued to rise in global consumption, with a 30:70 fibre mix in favour of synthetics. India’s fibre mix, however, is reverse, with cotton fibre accounting for 60%. This has long been a source of export competitiveness red flag in MMF-rich categories like athleisure, fast-fashion basics and technical textiles.
What changes on the ground with fibre neutrality?
Cash flow and cost: Aligning MMF fibre and yarn at 5% eliminates the classic source of unutilised input tax credit for spinners and weavers. The Finance Ministry described this as a correction of the inverted duty structure and a direct easing of working-capital stress in a largely MSME-driven value chain. Early trade coverage echoes the same.
Product-market fit: A neutral tax lets Indian mills make more of what the world is ordering—polyester- and viscose-rich lines—without a policy headwind. Put plainly, you can’t build share in synthetics if your tax code penalises synthetic inputs.
Simpler pricing for blends: With the input end at 5%, classification disputes and odd pricing in cotton/MMF blends diminish. This will bring a sense of relief to the industry across the chain, even as some segments press for finishing the job with a single rate throughout.
There is also a retail-end shift: garments up to ₹2,500 now face 5% GST (earlier the 5% slab generally stopped at ₹1,000), while items priced above ₹2,500 will attract 18%. That should buoy volumes in the mass and value segments, where MMF share is large.
This is where a gentle, evidence-based compliment to the government is due. Rather than papering over the inversion with a higher uniform rate—which sparked opposition in 2021—the Council has chosen the harder but better path: lower upstream rates to match the downstream slab. That’s tidy policy design, and it aligns with the broader simplification to two principal GST slabs. It is conservative reform in the best sense: targeted enough to matter, simple enough to execute.
Will fibre neutrality unlock growth and exports on its own? It will help a lot, but complementary steps matter. MMF competitiveness also depends on input costs (PSF/VSF), logistics, and trade access. Those non-tax cost gaps are real, which is one reason why, even with tariff-driven buyer diversification, India hasn’t grabbed as much MMF share as Vietnam or others. But by removing a policy thumb on the scale, the reform gives Indian mills a fighting chance in categories that account for the bulk of global demand.
Crucially, the timing intersects with the “Trump tariff” effect in two ways. First, the original Section 301 actions against China pushed a measurable shift in U.S. sourcing away from China and toward alternative suppliers, with well-documented diversion and price effects. Second, the 2025 tariff gyrations have injected fresh uncertainty and periodic cost spikes—factors that can either paralyse orders or prompt strategic re-sourcing. India’s neutral, lower-friction input tax regime positions mills to convert such turbulence into orders instead of balance-sheet strain.
Unsurprisingly, industry reaction has been broadly supportive. Tax alignment between fibres is widely welcomed, even as the demand for a uniform 5% across the entire chain continues as the next step. The raising of the price cap threshold from ₹1000 to ₹2,500 has been equally welcomed. However, a steep 18% above ₹2,500 is feared to dent mid-market winterwear and occasion-wear unless offset by discounts or re-pricing. A monitored, data-led recalibration of the threshold- if warranted- would preserve demand while keeping the fiscal math intact.
But the big picture is clear. The government has peeled the policy hand off the scale and, in doing so, aligned India’s production incentives with what global buyers are ordering. If fibre neutrality is coupled with smooth refunds, steady raw-material availability, and aggressive trade outreach, it can unleash a lot of latent energy – especially in MMF-rich lines that benefited from tariff-driven sourcing shifts. In that sense, GST 2.0 doesn’t pick winners; it stops the government from doing so. Which is precisely why it could make Indian textiles more competitive at home and abroad. If fibre neutrality now travels with steady refunds, steady inputs, and smart trade outreach, India can turn a long-standing disadvantage into a competitive edge. Yet another step towards Viksit Bharat.
*Dr. Samar Verma is an economist and public policy professional. He has worked in a leading textile company in Ahmedabad and published many research papers on the World Trade Organization (WTO) and Textiles for think tanks and international agencies.
