GST 2.0 welcome relief for Tiruppur SMEs, but not ultimate fix to Trump’s tariffs

For Tiruppur, the Southern textile cluster giant that clocks about Rs 45,000 crore in annual output, the Goods and Services Tax (GST) fix felt like the long-awaited patch for a self-inflicted wound. Small and medium exporters (SMEs) here had been squeezed for years by an “inverted duty” problem: yarns and other inputs in the man-made fibre (MMF) chain were taxed at higher rates than the finished t-shirt or sweater, leaving factories loaded with unusable input-tax credits (ITC) and short on working capital.

The GST Council’s recent decision to align MMF rates and keep mass-market apparel (priced under Rs 2,500) at 5 per cent will matter in a practical, immediate way for thousands of firms in Tiruppur: it reduces classification ambiguity, unclogs refunds and restores predictability to costing and cash flow. KM Subramanian, president of the Tiruppur Exporters’ Association, told The Federal the biggest gain is simple: “predictability.” There will be fewer surprises on refunds and less cash tied up in blocked ITC, which lets units run orders and pay wages again.

Also read: Tiruppur textiles caught between GST relief and Trump tariff shock

Domestic relief, global pain

So why does the mood in Tiruppur feel only half relieved? Because while GST 2.0 tackles a domestic efficiency problem, Washington’s tariff move, what exporters call a "full-blown demand shock" at the border, is an external blow that domestic reform cannot neutralise.

The US administration’s “reciprocal tariffs” exercise first landed in April as a blanket framework (a 10 per cent baseline plus country-specific add-ons). In JM Financial’s April briefing the US calculation is laid out: the administration’s “derived” measure put India at a 52 per cent level, which it discounted to a reciprocal (applicable) tariff of 26 per cent at the time (now its at 50 per cent).

The research note warned that the blanket approach is blunt and that India’s actual tariff gap with the US (weighted averages) was far smaller, so the reciprocal numbers looked disproportionate.

Also read: What will Modi do for TN’s textile hubs hit by US tariffs? DMK asks

That was April. Since then, exporters say the punitive charge has steepened; the blanket reciprocal framework being applied to apparel and other labour-intensive items now sits at roughly 50 per cent, freezing orders that had only just begun to recover after COVID and a weak global market. Thirukkumaran K, general secretary of the association, described buyers as “holding back or renegotiating” as US retail chains test their options and shift sourcing strategies.

Domestic taxes in Trump's calculations

There’s a bitter irony in how Washington framed its so-called “reciprocal” tariffs. JM’s April note makes clear that the US numbers weren’t based only on India’s actual import tariffs, but also on a grab-bag of so-called “non-trade barriers” — including domestic levies like GST. That is unusual to the point of distortion: no one counts internal consumption taxes as a protectionist measure, because they apply equally to Indian firms selling at home and to foreign firms operating here. By folding GST into its formula, Washington treated a universal domestic tax as if it were a discriminatory trade barrier.

And here’s the kicker: even though India has cut GST rates in textiles, the US has not trimmed its reciprocal tariff one bit. If you’re going to justify a punitive duty on the basis of our domestic taxes, logic demands you reduce it proportionately when those taxes are lowered. Instead, America has doubled down — raising the levy to 50 per cent and freezing Tiruppur’s orders — while ignoring the very tax changes its own methodology supposedly took into account.

Also read: Modi asked US to impose 50 pc tariff: DMK’s A Raja at Tiruppur protest

How much will US tariffs hurt?

That custody of the cost matters on two levels. The US alone accounts for roughly a third of the cluster’s annual Rs 45,000-crore exports, making it the single biggest buyer of Tiruppur garments. Even as the hunt for new markets in the EU, Latam, and other countries begins, still this is a loss of Rs 2,500–3,000 crore worth of knitwear that Tiruppur ships to the US every month, according to association estimates. With tariffs at 50 per cent, much of that flow has been interrupted. Subramanian says that with a 50 per cent duty slapped on Indian apparel, “orders worth several thousand crore rupees are already on hold or cancelled.”

Apart from lost orders, there is also the inventory build-up: when a large buyer flags a 50 per cent tariff over its line of goods, those volumes are re-priced or shelved; a cash-flow disaster for micro and small units that run on narrow margins and short credit lines. Second, industry leaders argue the economic incidence will not, in the end, be borne by Indian factories alone. “If you add 50 per cent at the point of import, it is American consumers who will ultimately pay more for the same t-shirt,” Subramanian told The Federal.

The scale of exposure is non-trivial. JM’s April briefing highlights that a concentrated share of India’s exports to the US sits in a handful of categories like telecom equipment, drugs, jewellery, and garments together account for more than half of flows, which means clothing producers like Tiruppur are in a strategically vulnerable position.

Need for credit, rebates

Even as exporters welcome GST rationalisation, they argue that domestic relief cannot end there. “GST refunds are only one part of the liquidity problem,” says Subramanian. Interest subvention (the government’s scheme to provide subsidised credit for exporters) has not been adequately extended to the knitwear sector, despite being a proven cushion against global demand shocks. With export orders frozen, Tiruppur’s small units will need cheap working capital to stay afloat.

Watch: Trump’s tariff hits Indian textiles: Tiruppur exporters under pressure

Similarly, exporters point to delays and caps in RoDTEP (Remission of Duties and Taxes on Exported Products), the scheme meant to refund embedded levies that are not covered by GST, such as electricity duty or mandi tax. “If RoDTEP rates remain low or payouts are delayed, it erodes our competitiveness exactly when buyers are demanding discounts to offset US tariffs,” says Thirukkumaran. In practice, this means exporters have to absorb the tariff hit abroad while still waiting for reimbursements at home.

GST can’t be end-all to relief

The Confederation of Indian Industry (CII) has warned that India must prepare for a world where tariffs and non-tariff barriers are increasingly used as weapons of economic statecraft. “Rising geopolitical tensions and economic nationalism are reshaping the global trade architecture,” its recent competitiveness report notes, urging deeper reforms to cut costs at home and integrate more strongly into global value chains.

For Tiruppur’s thousands of SMEs, GST 2.0 has provided that domestic relief. But as Trump’s tariff war escalates, the very competitiveness gains from smoother tax refunds risk being wiped out at the border. Subramanian and Thirukkumaran stress that GST fixes are necessary, as they free up the oxygen SMEs need to operate, but they cannot, alone, plug a 50 per cent tariff at the customer end.

“Domestic tax reform bought us breathing space,” Subramanian said; “what we need next is trade traction such as bilateral talks, faster certification, and supply-chain support so buyers don’t desert our cluster.”