Looking for expert help with Income tax and GST for cotton spinning mills and yarn manufacturers India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Key Takeaways
- Cotton yarn, man-made staple fibre, spun yarn, filament yarn and cotton waste are all 5% GST from 22 September 2025 (Notification 9/2025-Central Tax (Rate), Schedule I). Khadi yarn is exempt.
- With cotton in at 5% and yarn out at 5%, an inverted duty refund is rare. Credit on machinery and input services is never refunded under Rule 89(5); it's used up over time.
- Spinning someone else's fibre is 5% job work only if the owner is GST-registered. For an unregistered owner, the entry points to 18%.
- A mill with turnover above Rs 10 crore deducts 0.1% TDS on bale purchases above Rs 50 lakh per ginner per year, and new spinning machinery earns 20% additional depreciation.
- Audited mills: the AY 2026-27 audit report was due 21 October 2026 and the ITR is due 21 November 2026 (CBDT Circular 07/2026).
What is the GST rate on cotton yarn and spun yarn in 2026? 5%. Cotton yarn (5205 to 5207, other than khadi yarn), yarn of man-made staple fibres (5509 to 5511) and filament yarns (5402 to 5406) are all in Schedule I of Notification 9/2025-Central Tax (Rate), at 2.5% CGST plus 2.5% SGST, from 22 September 2025. Raw cotton and cotton waste are also 5%, and khadi yarn is exempt.
A spinning mill buys bales by the truckload, runs power-hungry machines round the clock and sells yarn to weavers and knitters, often in another State. The tax questions follow that cycle: what rate goes on the yarn invoice, whether the credit piling up in the ledger can ever come back as cash, who deducts TDS on the bale payments, and how much of a new ring frame you can write off in year one. This guide is for owners and finance heads of cotton and blended yarn mills, open-end spinning units and the CAs who audit them. It covers GST from 22 September 2025 and income tax for FY 2025-26 (AY 2026-27) under the Income-tax Act 1961, with the 2025 Act sections that apply from 1 April 2026.
Cotton yarn GST rate and HSN code: what goes on your yarn invoice?
5%, for almost everything a spinning mill buys or sells. Since 22 September 2025, Notification 9/2025-Central Tax (Rate) lists the whole fibre-to-yarn chain in Schedule I, where the central rate is 2.5%.
Comparison
GST on Fibre, Yarn and Spinning Waste from 22 September 2025
| Product (HSN) | GST | Notification entry |
|---|---|---|
| Cotton (lint) and cotton waste (5201 to 5203) | 5% | 9/2025-CT(R), Schedule I, S. No. 331 |
| Cotton sewing thread (5204) | 5% | 9/2025-CT(R), Schedule I, S. No. 332 |
| Cotton yarn, other than khadi yarn (5205 to 5207) | 5% | 9/2025-CT(R), Schedule I, S. No. 333 |
| Khadi yarn (Chapter 52) | Nil | 10/2025-CT(R), S. No. 144 |
| Synthetic or artificial filament yarns (5402 to 5406) | 5% | 9/2025-CT(R), Schedule I, S. No. 341 |
| Synthetic or artificial staple fibres (5503, 5504, 5506, 5507) | 5% | 9/2025-CT(R), Schedule I, S. No. 344 |
| Waste of man-made fibres (5505) | 5% | 9/2025-CT(R), Schedule I, S. No. 345 |
| Yarn of man-made staple fibres (5509 to 5511) | 5% | 9/2025-CT(R), Schedule I, S. No. 347 |
| Yarn of wool or animal hair (5106 to 5110) | 5% | 9/2025-CT(R), Schedule I, S. No. 329 |
Source: Notifications 9/2025 and 10/2025-Central Tax (Rate), 17 September 2025, in force 22 September 2025. No later amendment up to Notification 01/2026-Central Tax (Rate) touches these entries. IGST on inter-State sales is 5% (Notification 9/2025-Integrated Tax (Rate), Schedule I).
Blended yarn. A polyester-cotton or viscose-cotton blend goes either under cotton yarn (5205 to 5207) or man-made staple fibre yarn (5509 to 5511), depending on the fibre that predominates. Both entries are 5%, so the tax doesn't change. Still put the correct HSN on the invoice, because the buyer's credit and your GSTR-1 HSN summary rely on it.
Comber noil, soft waste and hard waste are cotton waste under 5202 and sell at 5%, the same as yarn. Polyester waste falls under 5505, also 5%.
Paperwork that scales with you. A mill with aggregate turnover above Rs 5 crore must issue e-invoices for B2B sales (Notification 13/2020-Central Tax as amended by Notification 10/2023-Central Tax, from 1 August 2023). Every consignment above Rs 50,000 needs an e-way bill before the truck leaves (Rule 138, CGST Rules). Our e-invoicing guide and e-way bill guide cover both.
Will the credit in your ledger ever come back as cash?
Usually not as a refund, and that's worth planning around. Section 54(3) of the CGST Act allows a refund of unused input tax credit in only two cases: zero-rated supplies made without paying tax, and credit that has built up because inputs carry a higher rate than the output.
For a spinning mill, the main input and the output now sit at the same rate:
- Cotton bales at 5% in, yarn at 5% out. No inversion.
- Polyester or viscose fibre at 5% in, spun yarn at 5% out. No inversion.
That leaves input goods taxed above 5%, such as some consumables, spares used up in production and packing material. Credit on these can create a small inverted refund in a slow month. But the refund formula in Rule 89(5) counts only credit on inputs as "Net ITC". Credit on input services (repairs, security, freight, professional fees) and on capital goods (a new ring frame or autoconer) never comes back through this route. It stays in the ledger and is set off against output tax over the coming months.
Example (November 2026, a Telangana mill): you buy lint worth Rs 3,00,00,000 from ginners in Maharashtra (5% IGST, Rs 15,00,000) and stores, spares and packing material worth Rs 20,00,000 at 18% (Rs 3,60,000). You sell yarn worth Rs 4,20,00,000 at 5%, which is Rs 21,00,000 of output tax. Credit available is Rs 18,60,000, so you pay Rs 2,40,000 in cash. Nothing accumulates, so there's nothing to refund.
Now say that in December you also install new machinery with Rs 40,00,000 of GST on it. That credit is yours to use against yarn sales, but it isn't refundable under Rule 89(5). At about Rs 2,40,000 of net output tax a month, it takes the better part of 17 months to absorb. Plan the working capital for that before you place the order.
Exports are different. Yarn exported under a letter of undertaking (LUT) without paying IGST is a zero-rated supply, and unused credit can be refunded under Section 54(3)(i). Our export of goods guide covers the LUT and refund steps, and our inverted duty refund guide explains the Rule 89(5) formula.
Spinning on job work: 5% or 18%?
Many mills spin, double or twist yarn from fibre that belongs to a trader or another mill, and bill only a conversion charge. The rate turns on who owns the fibre.
From 22 September 2025, S. No. 26 of Notification 11/2017-Central Tax (Rate), as substituted by Notification 15/2025-Central Tax (Rate), taxes job work on "textiles and textile products falling under Chapters 50 to 63" at 2.5% CGST, so 5% in all. Fibre and yarn sit in Chapters 52 to 55, so conversion for a registered principal is 5%. But "job work" under Section 2(68) of the CGST Act means processing goods belonging to another registered person. If the fibre owner is unregistered, the charge falls under item (vii), "treatment or process on goods belonging to another person", at 9% CGST, or 18% in all.
Keep the delivery challans for fibre received and yarn returned, and check that the principal's GSTIN is active before you bill at 5%. Our job work guide covers the challan and return timelines.
Buying straight from farmers? Most mills buy lint from ginners, who charge 5% on their own invoice. If you buy raw cotton (5201) directly from an agriculturist, you pay the 5% under reverse charge yourself (S. No. 4A of Notification 4/2017-Central Tax (Rate)). Our ginning mill guide walks through the self-invoice and cash-ledger steps.
Income tax: TDS on bales, extra depreciation and the audit
0.1% TDS when you buy bales
If your turnover crossed Rs 10 crore in the previous year, you're a "buyer" for TDS on purchase of goods. You deduct 0.1% on what you pay any one seller above Rs 50 lakh in the year. From 1 April 2026 that's Section 393(1), Table S. No. 8(ii), of the Income-tax Act 2025, with the buyer defined in Section 402(6). Before that it was Section 194Q of the 1961 Act.
Example (TY 2026-27): your mill's turnover was Rs 60 crore in FY 2025-26. You buy bales worth Rs 4,00,00,000 from one ginner during the year. TDS is 0.1% of Rs 3,50,00,000 (the amount above Rs 50 lakh), or Rs 35,000. You report it in your quarterly TDS statement in Form 140. The same rule works in reverse: a large weaving or knitting unit buying your yarn deducts 0.1% on its payments to you, and you claim that credit in your ITR. Our purchase-of-goods TDS guide covers both sides.
Additional depreciation on new machinery
A spinning mill is a manufacturer, so new plant and machinery earns an extra 20% depreciation in the first year, over and above normal depreciation. It's Section 33(8) and (9) of the 2025 Act from TY 2026-27, and Section 32(1)(iia) of the 1961 Act for FY 2025-26. The conditions:
- the machine is new, not used by anyone in India or abroad before you installed it;
- it isn't installed in an office or residential premises, and isn't an office appliance or road transport vehicle;
- its whole cost isn't already written off in one year.
The extra 20% isn't available if your company pays tax at the concessional rate under Section 115BAA of the 1961 Act, whose sub-section (2) computes income without Section 32(1)(iia). From TY 2026-27 the same bar is in Section 205(1)(a) of the 2025 Act, and for individuals in the new regime in Section 202(2)(a)(vi).
If the machine is put to use for less than 180 days in the year, you get 10% that year and the other 10% the next year.
Example: new compact spinning machines costing Rs 2,00,00,000 are first used on 10 December 2026. That's 112 days to 31 March 2027, under 180. Additional depreciation is Rs 20,00,000 in TY 2026-27 and Rs 20,00,000 in TY 2027-28, plus normal depreciation on the block. Our depreciation guide covers the block rates.
Paying small ginners on time
Many ginning units are registered micro or small enterprises. If you pay them later than the time limit in Section 15 of the MSMED Act, 2006, the purchase cost is deductible only in the year you actually pay. It's Section 43B(h) of the 1961 Act and Section 37(2)(g) of the 2025 Act. Unlike most 43B items, paying before the return due date doesn't save it (Section 37(3)). For a mill buying crores of bales on credit in March, this can move a big expense into the next year. See our Section 43B(h) guide.
Tax audit and the AY 2026-27 dates
A mill with turnover above Rs 1 crore needs a tax audit, and the limit rises to Rs 10 crore only if cash receipts and cash payments are each within 5% of the totals (Section 44AB(a); Section 63, Table S. No. 1 of the 2025 Act). Nearly every spinning mill crosses Rs 10 crore anyway. For AY 2026-27, CBDT Circular No. 07/2026 dated 28 September 2026 extended the audit-case dates:
Comparison
AY 2026-27 Due Dates for an Audited Spinning Mill
| Filing | Original date | Extended date |
|---|---|---|
| Tax audit report (Form 3CA/3CB with 3CD) | 30 September 2026 | 21 October 2026 |
| ITR for audit cases (Explanation 2(a) to Section 139(1)) | 31 October 2026 | 21 November 2026 |
Source: CBDT Circular No. 07/2026 dated 28 September 2026, incometax.gov.in Latest News
Mills run as private limited companies also have their ROC filings after the accounts are adopted. Our tax audit guide explains Form 3CD.
Common mistakes spinning mills make
- Expecting a refund of machinery GST. Credit on capital goods and input services is outside the Rule 89(5) formula. Budget for it to be used against output tax over months, not refunded.
- Billing every conversion job at 5%. The 5% job work rate needs a registered fibre owner. Check the principal's GSTIN before you invoice.
- Missing 194Q on bale purchases. Once your previous-year turnover crosses Rs 10 crore, the 0.1% applies on each ginner's purchases above Rs 50 lakh. Set it up in the purchase ledger from 1 April, not at audit time.
- Losing additional depreciation on second-hand machines. Imported or local, a machine used by anyone before you doesn't qualify for the extra 20%.
- Paying MSME ginners late at year end. Late payments to micro and small suppliers shift the deduction to the year of payment.
How Tax Garden helps spinning mills
We file your GSTR-1 and GSTR-3B, reconcile bale purchases against GSTR-2B and track the credit build-up from new machinery through our GST return filing service. We deduct and file the 0.1% purchase TDS through our TDS filing service, and at year end we prepare the books, the tax audit and the return through our ITR filing service. For mills run as companies, our ROC compliance service handles the annual filings, and our payroll service runs PF and ESI for shift workers. Related reading: our guides for cotton ginning mills, handloom weavers and textile and garment GST rates.
