25 July 2025, Mumbai
A celebrated digital payments revolution is facing an unexpected reversal in Karnataka, with small vendors ditching UPI transactions amidst a rise in GST notices. This ‘digital diveback’ is creating widespread panic among auto drivers, flower sellers, and milk vendors, but its long-term implications for the fashion and apparel retail sector are particularly concerning. While the state's Commercial Taxes Department insists GST applies irrespective of payment method, the fear of complex compliance is pushing micro-businesses back to cash, threatening to derail the formalization of a significant part of India's textile and garment industry.
The discomforting truth is that avoiding UPI won't negate tax liability; it merely pushes small enterprises into the shadows, making them vulnerable and less competitive. When traditional apparel boutiques, local tailors, and street vendors retreat to cash-only, the vacuum will inevitably be filled by large, GST-compliant online platforms and organized retail chains, which already offer the digital convenience customers expect.
The looming threat to fashion's micro-entrepreneurs
The Indian fashion and apparel market heavily relies on its unorganized sector. Small businesses, the backbone of local fashion, have been slowly embracing UPI, bridging the gap with larger players. This sudden reversal risks:
Reversal of formalization: The shift back to cash by small apparel vendors will impede the formalization of the sector, making it harder to track transactions, claim input tax credits, and integrate into the broader, organized supply chain.
Customer migration: Consumers, particularly in urban areas, have grown accustomed to seamless UPI payments for all purchases, including clothing. A "cash-only" approach by local shops will drive them towards e-commerce giants and larger retail stores that offer robust digital payment options.
Competitive disadvantage: Organized fashion retail, already GST-compliant, stands to gain significantly. They can offer transparent pricing and digital convenience, further consolidating market share while smaller players grapple with compliance fears.
Table: Current GST rates for fashion & apparel in India
Category |
GST Rate |
Notes |
Apparel & Footwear (Sale value < ₹1000) |
5% |
|
Apparel & Footwear (Sale value ≥ ₹1000) |
12% |
Includes readymade garments |
Synthetic/Man-Made Fibers & Fabrics |
18% |
|
Cotton Fibers & Fabrics |
5% |
|
Tailoring Services |
5% |
(Reduced from 18% under HSN 9988) |
Source: ClearTax, Razorpay (Based on recent GST Council discussions and existing norms)
Policy reform the real solution
The solution lies not in vendors abandoning UPI, but in pragmatic policy reforms.
MSME-style GST exemptions: Introducing higher, MSME-specific GST exemptions for micro-businesses with turnover below Rs 10 lakh could provide a much-needed buffer. Currently, the threshold is Rs 40 lakh for goods and Rs 20 lakh for services (or Rs 10-20 lakh in special category states), which can still be high for truly micro-enterprises.
Simplified compliance & automated filing: Automated, user-friendly filing systems designed for small vendors, minimizing complex paperwork, are crucial.
Targeted education programs: Extensive, localized education campaigns are needed to explain GST basics, the benefits of the composition scheme (1 per cent GST rate for traders, 5 per cent for restaurants, 6 per cent for service providers for turnovers up to Rs 1.5 crore for goods or Rs 50 lakh for services), and how to differentiate personal from business transactions.
Grace periods for first-time filers: Offering grace periods for first-time filers to regularize their status without heavy penalties would build trust and encourage compliance rather than fear.
The Commercial Taxes Department's stance that GST applies to supply value, not payment method, is legally sound. However, its implementation needs empathy and practical solutions that don't push the informal economy into hiding. For the dynamic fashion and apparel retail sector, ensuring small vendors can comfortably operate in the digital realm, with simplified tax compliance, is vital for inclusive growth and the continued success of "Digital India."