GST 2.0 rewrites fashion economics, premium labels struggle as mass market grows

08 December 2025, Mumbai

Three months after the implementation of revised Goods and Services Tax (GST), or GST 2.0, the Indian apparel industry is facing a split reality. While mass and mid-premium segments are seeing a boost due to their affordability, the premium apparel category (items priced above Rs 2,500) is struggling under the sharp GST increase from a 12 per cent to an 18 per cent. This 6-percentage-point hike translates to a 5.36 per cent jump in the final consumer price for a typical item, a price shock that is silently eroding the profits of organized retail.

Where has it impacted the premium category

Data analysis and early industry observations reveal the impact is concentrated across three critical areas.

1. Price-sensitive squeeze zone

The segment most severely affected is the aspirational middle-class buyer shopping in the Rs 2,500-3,500 price bracket. This is the ‘squeeze zone’ where consumers are proving highly price-sensitive and are actively trading down to sub-Rs 2,500 products to remain in the 5 per cent GST slab.

• Retailer dilemma: Brands with a high share of premium products face a stark choice: pass on the 6 per cent cost and risk losing the consumer to the lower-tax slab, or absorb the cost and suffer a significant hit to their profit margins.

• The price shock: For an item with a base price of Rs 5,000, the tax jump adds Rs 300, raising the final price from Rs 5,600 to Rs 5,900. This Rs 300 difference is proving to be a critical trigger for immediate buyer resistance.

2. Financial gravity

Although premium products (above Rs 2,500) account for only 10 per cent of total units sold, they generate a disproportionate 35 per cent of organized apparel revenue. This segment, often the profit engine for retailers, is now the direct target of the 18 per cent GST. The slowdown here is particularly damaging to the financial health of the organized retail sector, impacting categories like high-value ethnic wear, branded winterwear, and wedding wear.

3. GST absorption index

Preliminary reports suggest that many retailers, particularly those gearing up for the crucial festive and wedding season, absorbed a significant portion of the GST hike to sustain consumer demand. This unquantified but widespread margin absorption is an attempt to tackle the ‘sales migration ratio’ that is the rate at which consumers shift to lower price points. For instance, one foreign brand executive stated they are absorbing the impact for items above Rs 2,500, which make up 20 per cent of their portfolio, to offer more value to consumers. Another retailer observed, they absorbing part of the hike in premium categories like lehengas to ensure continued customer value.

Table: The financial weight of the premium segment

The table captures the post-GST revision shifts in India’s apparel market, measured three months after new tax slabs altered effective retail pricing. The metrics reveal how consumer value perception is changing and why the premium segment now carries disproportionate financial influence.

Mass segment — high footfall, low revenue power

The mass segment still accounts for 65 per cent of total unit sales, showing that a majority of Indian consumers remain price-sensitive and continue to shop in the value-driven tier. However, despite this huge volume, it contributes only 36 per cent to total revenue. This imbalance highlights the low ticket size of products in this category: brands sell a lot, but margins remain thin.

Mid-premium segment — squeezed in the middle

This tier accounts for 25 per cent of sales volume and 29 per cent of revenue, which indicates a more balanced ratio of units to earnings. Yet the mid-premium category is under structural pressure. GST has pushed many brands’ price points upward, blurring the difference between mid-premium and premium. As shoppers trade up for perceived value or branded quality during discount-heavy periods, the mid-tier’s traditional role as the aspirational segment is shrinking.

Premium segment — smallest volume, largest revenue

The most dramatic shift appears in the premium category. Although premium products make up only 10 per cent of the total units sold, they contribute 35 per cent of overall revenue, nearly equalling the much larger mass segment. This clearly shows two underlying behavioral trends.

Post-GST price rationalization has not deterred premium buyers, who are less price-sensitive and prioritize quality, design, and brand equity. And there is a visible shift of urban middle-class consumers towards premium labels, aided by EMI-based payments, ‘Buy Now Pay Later’ options, and premiumisation-led marketing.

Brands re-engineering price points

Facing the threat of consumer down-trading, some brands are adopting counter-measures to stay competitive, highlighting the industry's agility.

Product re-engineering or Rs 2,499 strategy: To retain the aspirational middle-class buyer, select brands have successfully re-engineered their products to fall just below the Rs 2,500 threshold. This involves subtle adjustments in material choice, trims, or packaging to bring the SKU price point to Rs 2,499. This enables the garment to be taxed at the much lower 5 per cent GST slab, effectively offering comparable style and quality at a lower final consumer price, helping to counter the sales migration.

Digital-first platforms, like Virgio, are prioritizing the Rs 1,500-Rs 2,499 range, focusing on cost-per-wear value and versatility to align with smarter buying decisions from price-sensitive consumers.

Meanwhile brands focusing on the mid-premium segment (up to Rs 2,500) are witnessing strong traction. The extension of the 5 per cent GST slab up to Rs 2,500 (from the earlier Rs 1,000) is acting as a strong demand stimulant. This sweet spot is attracting consumers who still desire affordable premium fashion without incurring the 18 per cent tax burden.

This profit shock on premium apparel remains a major concern for the industry, prompting a fundamental re-evaluation of pricing, inventory, and product positioning strategies three months into the new regime.

Thus the the GST revision has not uniformly impacted the market; instead, it has increased the polarisation of Indian apparel consumption. The mass segment remains dominant in volume but stagnant in value creation, while the premium segment though small has emerged as the financial engine of the industry. This redistribution of revenue share signals a long-term shift: India’s apparel market is moving from being volume-led to value-led, powered by premiumisation and brand-conscious urban consumers.

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