GST on Khadi Products

GST on Khadi Products

Khadi yarn and Khadi fabric supplied by KVIC-certified institutions attract a nil GST rate under the current rate schedule — making them among the most lightly taxed textiles in the country. However, nil-rate treatment is not automatic: it hinges on KVIC certification, the nature of the supply (fabric versus ready-made garment), and whether the fabric is pure Khadi or blended with synthetic fibre. This guide maps the exact rate positions, the compliance obligations, the ITC apportionment rules, and the export treatment that apply to Khadi sellers, cooperatives, and exporters in FY 2026-27 / AY 2027-28.

GST Rate Positions for Khadi Products in FY 2026-27

The GST rate on a Khadi product depends on what is being sold, not merely what it is made of. Three distinct buckets govern the rate treatment.

Nil-Rated Supplies (0% GST)

The following supplies attract GST at 0% when made by KVIC or by institutions holding KVIC certification:

• Hand-spun Khadi yarn — produced on a charkha or approved spindle and certified under KVIC norms
• Khadi fabric (cloth sold by the metre) — hand-spun and hand-woven, bearing the KVIC certification mark, sold through KVIC outlets or their authorised Khadi institutions

These items are covered under the exemption notification issued under the CGST Act, 2017. No GST is collected from the buyer and no output tax liability arises for the seller on these specific supplies.

Taxable Supplies — Garments and Value-Added Khadi Items

Once Khadi fabric is stitched into a ready-made garment, the product moves to the readymade garment classification, and the standard textile slab applies:

This rate applies even if the garment is 100% KVIC-certified Khadi. The nil-rate privilege belongs to the fabric stage, not the finished-garment stage. A kurta made entirely of KVIC-certified Khadi cloth and priced at Rs. 800 attracts 5% GST; the same kurta priced at Rs. 1,500 attracts 12%.

Value-added Khadi products — embroidered Khadi dupattas, Khadi home furnishings, Khadi-based accessories — follow the same principle: the applicable rate is determined by the HSN heading of the finished product, not by the raw material used.

The Dominant-Fibre Rule for Blended Fabrics

Many products marketed as "Khadi" are blended with polyester, rayon, or other man-made fibres to reduce cost or improve drape. The GST rules use the dominant-fibre principle: the rate applicable to the predominant fibre by weight governs the entire fabric.

• A fabric that is 55% Khadi cotton and 45% polyester is taxed as a cotton fabric — but it does not qualify for the KVIC nil-rate because it is not pure hand-spun, hand-woven Khadi.
• A fabric that is 60% polyester and 40% Khadi cotton is taxed as a synthetic fabric.

Blended fabrics carrying "Khadi" branding but without KVIC certification are always taxable. Sellers who incorrectly classify these as nil-rated face short-payment demands, interest under Section 50 of the CGST Act at 18% per annum, and penalties under Section 74 if a Proper Officer determines the mislabelling was deliberate.

KVIC Certification: The Gateway to Nil-Rate Treatment

The nil-rate benefit is conditional, not universal. The pivotal requirement is that the supply must originate from an institution registered with and certified by the Khadi and Village Industries Commission (KVIC), a statutory body under the Ministry of MSME.

What Qualifies as Authentic Khadi

KVIC's certification process examines three elements:

1. Spinning process — yarn must be hand-spun on a charkha or approved spindle; no machine spinning
2. Weaving process — fabric must be hand-woven on a loom; power-loom or auto-loom output does not qualify
3. Institutional linkage — the producer must be affiliated with a KVIC-recognised Khadi institution

Products satisfying all three carry the KVIC certification mark — a label with a unique identification code. This mark is the primary documentary evidence for nil-rate treatment during any GST audit or inspection.

Documentation You Must Maintain

If you are a Khadi institution, cooperative, or retail outlet claiming the nil-rate on fabric supplies, keep the following on file for every transaction:

1. Copy of your KVIC institution registration certificate (valid and current for the period)
2. KVIC certification mark or label licence number for the specific product batch
3. Bill of Supply (not a tax invoice) correctly identifying the product as "Khadi fabric — Nil-rated supply under Notification 2/2017-CT(Rate)"
4. Purchase records from certified weavers or spinners in your upstream supply chain
5. If selling through an authorised outlet: the authorisation letter from the parent KVIC institution

A GST officer conducting a Section 65 audit or a Section 67 inspection will request these documents. Absence of KVIC certification records is treated as a failure to establish the exemption claim — the liability shifts to the seller.

GST Registration for Khadi Institutions

When Registration Is Mandatory

A Khadi institution that deals only in nil-rated fabric and yarn is technically exempt from GST registration until its aggregate turnover crosses Rs. 40 lakhs (Rs. 20 lakhs for special-category states). Importantly, aggregate turnover under Section 2(6) of the CGST Act includes exempt and nil-rated supplies — so a cooperative that turns over Rs. 45 lakhs in nil-rated fabric sales must still register.

Four additional triggers create mandatory registration regardless of turnover:

1. Inter-state supply — even a single inter-state nil-rated supply triggers mandatory registration under Section 24 of the CGST Act.
2. E-commerce supply — supplying through an e-commerce operator that collects TCS requires registration with no turnover threshold (Section 24(ix)).
3. GeM listing — Government e-Marketplace requires a GSTIN for seller onboarding; no GSTIN means no listing.
4. Any taxable supply alongside exempt ones — the moment a Khadi institution adds a taxable item (readymade garments, handicrafts) to its mix, registration is mandatory once the aggregate threshold is crossed.

Voluntary Registration: Why It Often Makes Sense

Institutions below the threshold often benefit from voluntary registration under Section 25(3) of the CGST Act:

• Institutional buyers and government departments expect GSTIN-linked documents before processing payment
• GeM access requires a GSTIN
• Registered exporters can claim ITC refunds on capital expenditure related to zero-rated (export) supplies

Input Tax Credit: What a Khadi Unit Can Actually Claim

This is the area that causes the most compliance errors among Khadi institutions. The answer depends entirely on whether the unit makes only nil-rated supplies or a mix of taxable and exempt supplies.

The Exempt-Supply Block

Under Section 17(2) of the CGST Act, 2017, ITC is not available on inputs, input services, or capital goods used exclusively in making exempt or nil-rated supplies. Any input directly consumed in Khadi fabric or yarn production — raw cotton, dyes, electricity for spinning — does not generate claimable ITC. Those embedded GST amounts become a cost of production.

Apportionment Under Rule 42 and Rule 43

If a Khadi institution also sells taxable items — garments, handicrafts, food products under a broader village-industries umbrella — it has mixed outward supplies. ITC on common inputs (inputs that serve both exempt and taxable supplies) must be apportioned:

• Rule 42 of the CGST Rules, 2017 — for inputs and input services
• Rule 43 of the CGST Rules, 2017 — for capital goods

Under Rule 42, the reversal formula is:

> Reversal (D1) = (Exempt turnover ÷ Total turnover) × Common ITC availed

This reversal must be computed and reported in GSTR-3B each month (or quarterly under the QRMP scheme). At the year end, aggregate monthly reversals are reconciled against the annual figure and adjusted in the September 2027 return for FY 2026-27.

Worked Example: ITC Apportionment for a Khadi Cooperative

Profile: Sutra Khadi Cooperative, Rajasthan. GST-registered. FY 2026-27 annual turnover:

Common ITC availed on shared inputs (cotton yarn, dyeing services, packaging material used for both fabric and garments): Rs. 60,000 for the year.

Step 1 — Compute exempt turnover proportion

Rs. 18,00,000 ÷ Rs. 25,00,000 = 72%

Step 2 — Calculate ITC reversal (D1)

72% × Rs. 60,000 = Rs. 43,200 must be reversed

Step 3 — Net ITC claimable

Rs. 60,000 − Rs. 43,200 = Rs. 16,800 is eligible ITC against the output GST on kurtas

What happens if the cooperative omits the reversal?

If the Rs. 43,200 reversal is skipped for three consecutive years: total wrongly retained ITC = Rs. 1,29,600. A Section 73 demand would recover Rs. 1,29,600, plus interest at 18% p.a. from the month of wrong availment (potentially Rs. 40,000–Rs. 55,000 over three years), and a minimum penalty of 10% of the tax — Rs. 12,960. Under Section 74 (suppression alleged), the penalty can match the full demand, i.e., Rs. 1,29,600. A simple monthly discipline — compute D1 before filing GSTR-3B — prevents all of this.

E-Commerce and Government Procurement

GeM Listings and GST Invoicing

Government e-Marketplace (GeM) is the largest single procurement channel for Khadi institutions targeting central and state government buyers. Key points:

• GSTIN is mandatory for GeM seller onboarding
• Every fulfilled order requires a Bill of Supply (for nil-rated fabric) or tax invoice (for taxable garments) uploaded within 48 hours of delivery
• Bills of Supply must clearly reference the exemption notification number and your KVIC certification details

Government departments registered as GST TDS deductors under Section 51 of the CGST Act must deduct 2% GST-TDS (1% CGST + 1% SGST) on intra-state taxable supplies exceeding Rs. 2.5 lakhs per contract. This TDS credit appears in your GSTR-2B and can be offset against your output tax liability — track it every month so you are not overpaying in cash.

TCS Obligations and the Mandatory-Registration Trap

Listing on private e-commerce platforms (Amazon, Flipkart, Myntra, Craftsvilla) triggers two consequences:

1. The platform deducts TCS at 0.5% (0.25% CGST + 0.25% SGST) on the taxable value of your supplies routed through it, under Section 52 of the CGST Act. This TCS credit reflects in your GSTR-2B and is adjustable.
2. Section 24(ix) of the CGST Act mandates GST registration for any person supplying through an e-commerce operator — no turnover threshold applies. A small weaver collective with annual platform sales of Rs. 6 lakhs must still register. Operating without registration in this scenario is an offence under Section 122: penalty of Rs. 10,000 or the tax evaded, whichever is higher.

Bulk Supply to Government Departments

For direct bulk supply to state Khadi boards, Railways canteens, or PSU procurement cells, ensure your invoice clearly states:

"Supply of Khadi fabric — Nil-rated under S.No. [X] of Notification No. 2/2017-Central Tax (Rate) dated 28.06.2017 as amended — KVIC Certification No.: [XXXXX]."

This protects both parties in the event of a future audit and prevents the buyer's accounts department from incorrectly deducting TDS on a nil-rated supply.

Exporting Khadi: Zero-Rating in Practice

LUT Route vs. IGST Payment Route

All exports are zero-rated supplies under Section 16 of the IGST Act, 2017. For Khadi exporters, this means zero effective GST on exported products. Two routes are available:

Route 1: LUT (Letter of Undertaking) — Recommended for Regular Exporters

• File Form GST RFD-11 on the GST portal before the first export shipment of FY 2026-27
• Export goods without paying IGST on the export invoice
• Claim a refund of accumulated ITC on inputs used for the exported Khadi via Form RFD-01, filed within two years of the relevant export date
• ITC refund is computed using the formula in Rule 89(4) of the CGST Rules: Refund = (Export turnover of goods ÷ Adjusted total turnover) × Net ITC

Route 2: Pay IGST, Claim Automatic Refund

• Charge IGST on the export invoice at the applicable rate
• Declare the shipping bill number and date in GSTR-1
• The ICEGATE-GST portal integration triggers an automatic refund, typically processed within 7–10 working days for clean cases with no discrepancies

For Khadi exporters with regular overseas orders, Route 1 (LUT) preserves cash flow — you never lay out IGST and wait for its return.

RoDTEP and DGFT Documentation

Khadi exports may qualify for the RoDTEP (Remission of Duties and Taxes on Exported Products) scheme, which reimburses embedded taxes not covered by direct GST refunds. RoDTEP rates for textile HSN chapters (Chapters 50–63) are notified product-by-product and updated periodically.

To avail RoDTEP without delays:

1. Declare the RoDTEP option ("Y") on each shipping bill at the time of export filing — you cannot claim it retrospectively
2. Ensure ICEGATE auto-generates RoDTEP scrips in your DGFT e-wallet after Let Export Order (LEO)
3. Maintain Foreign Inward Remittance Certificates (FIRCs) or Bank Realisation Certificates (BRCs) as proof of foreign exchange receipt — DGFT and customs auditors request these routinely
4. HSN codes on export invoices must exactly match the codes declared on shipping bills and in GSTR-1; mismatches delay refunds and can trigger customs queries

Common Mistakes That Attract GST Scrutiny

The following errors surface repeatedly in departmental audits of Khadi institutions. Each comes with a straightforward fix.

1. Treating readymade Khadi garments as nil-rated fabric The nil-rate applies to Khadi cloth sold by the metre, not to stitched garments. Applying 0% to a finished kurta is a classification error. Use 5% or 12% as applicable and issue a tax invoice.

2. Not reversing ITC on exempt supplies in monthly GSTR-3B Every institution with mixed supplies must compute D1 under Rule 42 before each GSTR-3B filing. Set up a spreadsheet that calculates the exempt-supply proportion from your monthly turnover figures, and journal the reversal as a standard monthly close item.

3. Calling a power-loom fabric "Khadi" on GST invoices Products produced on power looms and sold as "Khadi" without KVIC certification are taxable at the standard rate applicable to the dominant fibre. Claiming nil-rate on such goods creates a Section 74 exposure — penalty up to 100% of the tax evaded if suppression is established.

4. Missing mandatory registration for e-commerce supplies Small weavers who begin selling on Amazon or Flipkart assume the Rs. 40 lakh threshold protects them. Section 24(ix) removes that protection entirely. Register before your first e-commerce sale.

5. Filing GSTR-1 without correct HSN codes HSN code reporting at the 4-digit level is mandatory for most registered taxpayers, and 8-digit for those above Rs. 5 crore in turnover. Khadi yarn typically falls under Chapter 52 (cotton) or Chapter 53 (vegetable fibres); Khadi fabric under Chapter 52 or 54; readymade garments under Chapter 61 (knitted) or Chapter 62 (woven). Misclassification attracts notices under Section 61 (scrutiny of returns).

6. Exporting without a filed LUT Exporting without a valid LUT and without paying IGST is treated as a violation under Section 16(3) of the IGST Act — the zero-rated benefit is lost for that consignment unless regularised. Filing a fresh LUT for FY 2026-27 takes under 15 minutes on the GST portal; do it before your first export shipment of the year.

7. Skipping the FY-end ITC reconciliation The provisional monthly Rule 42 reversal is trued up in the annual calculation. Any under-reversal for FY 2026-27 must be corrected in the September 2027 GSTR-3B and disclosed in GSTR-9 (Annual Return) for FY 2026-27. Ignoring this step turns an arithmetic shortfall into an audit finding with interest running from the month of original wrong availment.

Key Takeaways

• Khadi fabric and hand-spun yarn are nil-rated under GST when supplied by KVIC-certified institutions — but this privilege applies at the fabric stage, not the garment stage.
• Readymade Khadi garments attract 5% GST (transaction value ≤ Rs. 1,000 per piece) or 12% GST (above Rs. 1,000) — identical to all other readymade garments.
• KVIC certification is the documentary foundation for nil-rate treatment; blended or power-loom fabrics sold as Khadi are taxable at the dominant-fibre rate and can attract Section 74 penalties if mislabelled.
• ITC on inputs used exclusively for nil-rated fabric is blocked under Section 17(2); institutions with mixed supplies must apportion common ITC monthly under Rule 42 and reverse the exempt-supply proportion in GSTR-3B before every filing.
• E-commerce sellers must register under GST regardless of turnover — Section 24(ix) overrides the Rs. 40 lakh threshold the moment you supply through any TCS-collecting platform.
• Exports are zero-rated; file your LUT (Form RFD-11) on the GST portal before the first export shipment of FY 2026-27 to export without IGST cash outgo and claim accumulated ITC refunds through Form RFD-01.
• GSTR-9 annual return for FY 2026-27 (due by 31 December 2027, unless extended) must reflect the corrected annual ITC reversal figure; discrepancies between provisional monthly reversals and the final annual number attract interest from the date of original wrong availment, not from the date of discovery.