GST Optimization on Stitching Charges for Garment Exporters

Garment exporters often face significant working capital constraints due to GST on export-related stitching services. While exports are zero-rated under GST, improper structuring of stitching charges and domestic inputs can lead to unnecessary IGST outflows, delayed refunds, and blocked cash flow.

This guidance note provides a step-by-step, analytical approach combining legal provisions, procedural compliance, and practical GST saving strategies.

Leveraging Export Under LUT (Letter of Undertaking)

Legal Basis:

• Section 16(3) of the CGST Act, 2017: Exports under LUT are zero-rated supplies.

• No IGST is payable upfront if LUT is filed; exporters can claim refunds on unutilized ITC for inputs used in exports.

Procedural Technicalities:

1. File LUT on GST Portal before export (Annually or per shipment).

2. Ensure LUT approval reference number is mentioned in export invoices.

3. Record export invoices against LUT to enable reconciliation during refund claims.

Reasoning:

• IGST payment upfront blocks working capital. LUT ensures cash-efficient zero-rated export, while ITC on domestic services can still be utilized.

Stitching Charges Classification: Domestic vs Export

Key Consideration:

• Whether stitching constitutes an export of service under GST depends on direct linkage with exported goods.

Analytical Approach:

1. Direct Export Linkage:

   • Stitching done specifically for exported garments → Export of service → Zero-rated.

2. Domestic Supply:

   • Stitching for domestic sales or unrelated to exports → Taxable @ 5% GST.

Supporting Law:

• Notification No. 12/2017-Central Tax (Rate) – Textile Job Work Services: Job work linked with goods supplied for export may be zero-rated, provided conditions are satisfied.

Reasoning:

• Misclassification of stitching as domestic supply triggers unnecessary GST, blocking capital and delaying refunds. Proper classification minimizes tax leakage.

Invoicing Strategy for Stitching Services

Technical Steps:

1. If stitching is domestic:

   • Invoice separately with GST at 5%.

   • Keep markup minimal to reduce taxable value.

2. If stitching is linked to export:

   • Invoice zero-rated under LUT; mention export order and LUT reference.

3. Ensure GST-compliant invoices to claim ITC.

Reasoning:

• Separate invoicing provides clarity for auditors and ensures ITC is claimable, avoiding GST disputes.

Input Tax Credit (ITC) Utilization

Analytical Considerations:

• GST paid on stitching and other inputs is fully creditable if used for taxable supplies or exports.

• If exports under LUT are zero-rated, ITC remains unutilized → eligible for refund.

Procedural Steps:

1. Maintain invoice-level ITC records for all stitching and input services.

2. Reflect ITC in GSTR-3B, reconcile with GSTR-2B.

3. File ITC refund application (Form GST RFD-01) with supporting invoices, LUT, and shipping bills.

Reasoning:

• Timely ITC claims and refunds prevent capital blockage and maintain liquidity.

GST Returns Filing and Reconciliation

Key Technicalities:

1. GSTR-1: Report export invoices under LUT separately; indicate zero-rated supply.

2. GSTR-3B: Reflect ITC and output tax separately; net ITC claimable/refundable.

3. Reconciliation: Ensure export invoices = shipping bills to prevent GST demand during audit.

Reasoning:

• Proper reporting ensures compliance, smooth refund processing, and audit defense.

Documentation for Audit Readiness

Essential Records:

• LUT approvals and references.

• Shipping bills and customs export documents.

• Invoices for stitching and input services.

• ITC utilization and refund claims.

Analytical Insight:

• Clear documentation links stitching charges to exported goods, protecting against GST scrutiny and demands.

Job Work Exemption / Concessional Rates

Legal Reference:

• Notification No. 11/2017-Central Tax (Rate): Job work in textiles may be exempt or concessional, subject to conditions.

Procedural Application:

• If stitching is performed by a registered job worker, GST liability may be reduced or exempted.

• Maintain job work agreements and input receipt records.

Reasoning:

• Exploiting job work exemptions can significantly reduce GST outflow and improve profitability.

Supply Chain Optimization

Analytical Steps:

• Use in-house stitching units or affiliated companies → reduces invoicing complexity.

• Consolidate multiple stitching contracts → simplifies ITC tracking and refund claims.

• Monitor input-output flow to maximize ITC utilization.

Reasoning:

• Streamlined supply chain ensures efficient GST credit flow and minimizes compliance errors.

Illustrative GST Savings: Stitching Charges

Particulars	Without Optimization (₹)	With LUT & Proper Stitching GST Handling (₹)
Export Invoice Value	10,00,000	10,00,000
Stitching Charges	1,00,000	1,00,000
GST on Stitching Charges (5%)	5,000	5,000 (claimable/refundable)
IGST on Export (18%)	1,80,000	Nil (LUT)
Total GST Paid (Upfront)	1,85,000	5,000
Refund Delay Effect	Capital Blocked	Cash Flow Improved

Analysis:

• Upfront IGST payment avoided → working capital freed.

• Claimable ITC/refund ensures cash-efficient zero-rated exports.

Practical Recommendations for Garment Exporters

1. Always export under LUT to avoid upfront IGST.

2. Classify stitching as export of service wherever feasible.

3. Invoice stitching separately, with minimal markup and GST compliance.

4. Claim and reconcile ITC meticulously; file refunds promptly.

5. Maintain strong audit trail linking stitching to exported goods.

6. Leverage job work exemptions under GST for stitching services.

7. Regularly reconcile GST returns with shipping bills to avoid disputes.

8. Optimize internal supply chain to manage GST and ITC flow efficiently.

Conclusion

A structured, analytical approach combining LUT benefits, proper classification of stitching, ITC utilization, and meticulous documentation enables garment exporters to:

• Reduce upfront GST burden

• Improve cash flow and working capital

• Ensure full GST compliance

• Legally save taxes on stitching charges

For exporters, adopting this approach with procedural discipline is critical to maximize GST savings while minimizing compliance risk.