The move could impact more aspirational middle-income consumers who are increasingly buying into branded clothing.

Some retailers told Mint they will pass on higher GST rates to consumers, while others are holding on to lower prices until the festival season is over.

In revised GST slabs announced late Wednesday night, the government has increased GST on articles of apparel and clothing accessories with a sale value exceeding ₹2,500 per piece to the 18% tax slab from the earlier, lower 12%. This could impact the prices of denim, jackets, winter wear, and formal ethnic or wedding wear.

However, in a positive move, the GST rate on apparel priced between ₹1,000 and ₹2,500 is cut from 12% to 5%. For the footwear industry, items priced up to ₹2,500 per pair have been placed in the 5% GST slab, down from 12% earlier. Earlier, the 5% GST was applicable to footwear priced up to ₹1,000. Footwear of a sale value exceeding ₹2,500 per pair continues to attract 18% GST.

On Thursday, the Retailer’s Association of India (RAI) said that all garments and footwear should ideally be taxed at 5%.

“Placing these in the 18% GST slab could hurt middle-class affordability, weaken the organized retail and garment sector, and impact categories such as wedding apparel, winter wear, artisan-made, festive, and traditional products,” RAI said in a statement released Thursday.

Festive wait

A retailer from an apparel chain, speaking to Mint on the condition of anonymity, said it plans to keep its existing prices until the festivities are over. It draws over 60% of its offline business from clothes over ₹2,500.

“We don’t want to upset the price points before Diwali. Any changes or hikes in prices will now happen post the festive season. We will think of other ways of managing costs, such as lowering some of our in-store promotions in late September,” he said.

However, he said that the market for clothes priced between ₹2,000 and ₹2,499 will now see a boost.

“While offline, 60% of our business is over ₹2,500, which will be impacted by the hike in GST rates, we are already thinking about boosting our offerings in the sub-2,500 price point. Overall, we see this as positive for a bulk of the apparel market that operates at price points lower than ₹2,000,” said this person speaking to Mint.

Apparel retailers have also been stressed on account of lower margins due to a high number of sales days and greater competition from online players.

The largest segment in apparel is the mass market, accounting for 60% of sales, followed by premium and luxury.

However, more consumers are trading up to branded clothing in large cities as well as small markets.

“Apparel and footwear are very diversified categories with more recent additions such as athleisure, formals, casuals, lowers, jackets, and wedding wear. Today, mid-level brands retail jackets and lowers, sets priced between ₹2,000 and ₹3,000,” said Abhishek Ganguly, founder and CEO, Agilitas, a sportswear company.

New consumers

“Over the last few years, costs for retailers have gone up. As a result, brands don’t have the ability to absorb these hikes and most likely will pass on the higher GST to consumers, which is set to impact overall demand,” said Ganguly.

Most retailers said that the GST cuts, in general, will help lift consumer demand.

Shares of leading Indian retail and fashion companies saw strong gains on 4 September, reflecting positive investor sentiment. Bata India Ltd surged 6.77%, to close at ₹1,241.10. Metro Brands Ltd gained 4.52%, ending the day at ₹1,223.80, up from ₹1,170.90. Arvind Fashions Ltd also moved higher by 2.21%, to close at ₹542.10. Aditya Birla Fashion and Retail Ltd rose 1.95% whereas Vedant Fashions Ltd stock slipped by 1.9%.

Most retailers said that aspirational consumers in the mid-income bracket want to trade up to better brands.

“It is a bit of a misnomer to say that the middle class and the common man buy all their garments below 2,500. If we go out to buy a good pair of jeans or a dress, I don’t think anything is available below ₹3,000 to ₹3,500 for the middle-class consumer,” said Rahul Mehta, chief mentor, Clothing Manufacturers Association of India (CMAI).

“We believe that there is a huge segment of the business above ₹2,500, which will impact the overall consumption. Apart from an impact on ethnic and festive wear and on woollens,” Mehta added that the biggest impact could be on the wedding business this year, as families try to cut down on trousseau expenses. Wedding clothing typically surpasses ₹10,000 for a single outfit with consumers, he said.

Higher spending

Meanwhile, Mehta added that the association is already in touch with the legal metrology department and the consumer affairs ministry regarding liquidating old stock.

“Retailers and manufacturers may be sitting on 2-3 months of inventory in anticipation of the festive and the subsequent wedding seasons. But legal metrology rules do not allow them to stick new labels or tags on old ones,” he said.

When the GST was first rolled out in 2017, apparel retailers were given a window to run pre-GST sales and liquidate old inventory. No such sale window seems to be in sight now. “The industry will need a large enough window to clear its inventory in such a sale,” Mehta said.

He warned that this may even prompt smaller mom-and-pop boutiques and informal wedding clothing suppliers to move to the grey market, pointing out that with an 18% tax, the difference between organized and grey market prices may become starker.

Others at price points lower than ₹2,500 said the GST reception, in general, is set to aid discretionary spending.

“It doesn’t directly impact the apparel industry and the space we operate in, but with more discretionary income in the hands of consumers due to the reduced GST rates in other categories and services, it will be net positive for us,” said Nitin Chhabra, chief executive officer of ace turtle, a tech-led retail group that is the India franchisee of global brands including Lee, Wrangler and Dockers.

Vaeshnavi K. contributed to the story