Updated on July 09, 2025 05:24:46 PM
One of India's most crucial commodities for both the agricultural and textile sectors, cotton runs a gamut that starts with raw cotton to completed cotton products in domestic and export markets alike. In the regime of the Goods and Services Tax (GST), cotton products, along with others, have specific HSN (Harmonized System of Nomenclature) codes attached to them for classification purposes. These HSN codes aid in simplifying the tax processes, providing transparency, and facilitating easier compliance on behalf of firms trading in cotton materials.
The GST on cotton depends on its form. Raw cotton, for example, is usually exempted from GST, particularly when sold by farmers to registered dealers or cooperatives. But once it goes through processes such as ginning, spinning, or weaving, the GST rate may be different. Cotton yarn is usually subject to 5% GST, while some cotton clothes and fabric could also be included in the 5% or 12% tax slab based on value and usage.
For cotton industry manufacturers, traders, and exporters, it is essential to be aware of the proper HSN code and corresponding GST rate to ensure correct invoicing and tax returns. Misclassification may result in penalties and non-compliance. Thus, awareness of the classification system prevents errors and keeps companies informed about current tax norms.
HSN is the abbreviation for Harmonized System of Nomenclature, an internationally agreed-upon standardized system created by the World Customs Organization (WCO) to categorize goods systematically. For GST (Goods and Services Tax) in India, the HSN codes are employed to classify goods for taxation purposes. Every HSN code is a multi-digit figure that classifies products depending on their nature, use, and composition.
In GST, the application of HSN codes facilitates simplification of the tax system by allotting a single code to products with similar characteristics, which enables easier filing of returns by businesses and easier monitoring of tax compliance by the government. The code is usually 4, 6, or 8 digits long, depending on the business turnover and nature of the product being sold. For example, companies with higher turnovers are mandated to employ more precise 6 or 8-digit codes.
The Goods and Services Tax (GST) on cotton and its related products depends on the type and processing stage of the material. Here's a breakdown:
| Cotton Material | GST Rate | Remarks |
|---|---|---|
| Raw Cotton | 0% | Exempt when sold by farmers to registered entities |
| Cotton Waste | 5% | Applies to cotton waste and garnetted cotton |
| Cotton Yarn | 5% | All types of cotton yarn, including combed or carded |
| Cotton Fabric (unstitched) | 5% | GST applies if not exempted by value or usage |
| Cotton Garments (≤ ₹1000) | 5% | Applicable to ready-made cotton garments below ₹1000 |
| Cotton Garments (> ₹1000) | 12% | Higher rate applies to garments priced above ₹1000 |
To make GST compliance run smoothly and ensure proper tax rates, the businesses engaged in cotton items need to understand what HSN codes to use. It classifies goods clearly under GST.
| Product | HSN Code | Description |
|---|---|---|
| Raw Cotton | 5201 | Cotton, not carded or combed |
| Cotton Waste | 5202 | Cotton waste, including yarn waste and garnetted cotton |
| Cotton Yarn (single, multiple, combed) | 5205–5207 | Cotton yarn other than sewing thread |
| Woven Cotton Fabrics | 5208–5212 | Fabrics made from cotton (unbleached, dyed, printed) |
| Cotton Garments (e.g., shirts, kurtas) | 6109, 6205 | Readymade garments made of cotton |
| Cotton Bed Linen and Home Textiles | 6302 | Cotton bed sheets, pillow covers, and home textiles |
In the GST regime, some cotton goods have been exempted from taxation, particularly when in an unprocessed or raw state. This is primarily intended to help farmers and traditional industries like handloom and small weavers. A breakdown of exempted cotton goods from GST is given below:
The Goods and Services Tax (GST) has impacted many sectors of the economy, including the cotton sector. This is a description of how GST impacted the cotton sector:
Conclusion
HSN (Harmonized System of Nomenclature) codes in GST have resulted in standardization and clarity in taxation and classification of cotton and allied materials. Raw cotton is levied a lower GST of 5% under HSN code 5201, which favors cotton farmers and ginning companies with the maintenance of low input costs. Yet, value-added and processed items such as cotton yarn (HSN 5205) and woven fabrics (HSN 5208 to 5212) are subject to GST rates between 5% and 12%, adding to the cost of production for manufacturers. Overall, though the GST regime and HSN classification have streamlined tax compliance and encouraged uniformity in the cotton supply chain, the increased tax rates on value-added cotton products present cost challenges.
At Professional Utilities, we leverage our industry knowledge and expertise to help businesses navigate complex regulations, minimize risks, and optimize operations for maximum efficiency and profitability.
Frequently Asked Questions (FAQs)
The raw cotton GST rate is 5%, classified under HSN code 5201.
No, raw cotton attracts a tax of 5%. Previously, it was partially exempt from VAT; GST introduced across-the-board taxation.
Cotton yarn is classified under HSN code 5205 and attracts a 5% GST rate.
Cotton fabrics are classified under HSN codes 5208 to 5212 and are taxed at a general rate of 5%, except for processed or mixed varieties that could have 12% GST.
Waste cotton is under HSN code 5202 and has a 5% GST rate.
Yes, exporters are eligible to claim Input Tax Credit (ITC) and receive a GST refund on inputs utilized in manufacturing/exporting cotton products.
Yes, every trader with a turnover exceeding the GST threshold is required to comply, though composition schemes and exemptions hold in some instances.
Yes, GST substituted several taxes with a single structure, enhancing clarity and minimizing the cascading effects of taxation.
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