Looking for expert help with Income tax and GST for silk reeling and silk twisting units 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
- Silkworm laying, cocoons, raw silk and silk waste are all GST-nil from 22 September 2025 (Notification 10/2025-CT(R), S. No. 138 to 140). A unit that only reels and sells raw silk needs no GSTIN.
- Silk yarn (5004 to 5006) is 5%. When you make the yarn from raw silk or cocoons and sell it to a registered buyer, the buyer pays that 5% under reverse charge (Notification 4/2017-CT(R), S. No. 4).
- Sales to unregistered weavers and resale by traders are not under reverse charge. There the seller charges the 5%.
- Reverse charge sales count as exempt supplies when you split input credit (Section 17(3), CGST Act), so a twisting unit loses most of its credit on common costs.
- Job reeling is 5% for a registered cocoon owner and 18% for an unregistered one. For income tax, Section 44AD (Section 58 from 1 April 2026) covers turnover up to Rs 2 crore or Rs 3 crore.
What is the GST rate on raw silk and silk yarn? Raw silk, not thrown (HSN 5002), is nil under S. No. 139 of Notification 10/2025-Central Tax (Rate) from 22 September 2025, and so are cocoons (5001) and silk waste (5003). Silk yarn (5004 to 5006) is 5%. When the yarn maker sells to a registered buyer, the buyer pays it under reverse charge.
Silk moves through three or four hands before it reaches a loom. A cocoon grower sells to a reeling unit at the cocoon market. The reeler turns cocoons into raw silk and sells it to a twisting unit, which twists it into warp and weft yarn for weavers and master weavers. GST treats each of these steps differently, and the yarn stage carries a reverse charge rule that catches many first-time filers. This post covers rates, registration, input credit, job reeling and income tax for FY 2025-26 (AY 2026-27) under the Income-tax Act 1961, with the Income-tax Act 2025 sections that apply from 1 April 2026. It's for reeling and twisting unit owners and the CAs who file for them. It doesn't cover the rearing farm itself.
Silk GST rate and HSN code: which items are nil, and where 5% starts
Comparison
GST on Silk from Cocoon to Fabric (from 22 September 2025)
| Item (HSN) | GST | Who pays | Notification entry |
|---|---|---|---|
| Silkworm laying and cocoons (5001) | Nil | No tax | 10/2025-CT(R), S. No. 138 |
| Raw silk, not thrown (5002) | Nil | No tax | 10/2025-CT(R), S. No. 139 |
| Silk waste (5003) | Nil | No tax | 10/2025-CT(R), S. No. 140 |
| Silk yarn sold by the person who made it from raw silk or cocoons, to a registered buyer (5004 to 5006) | 5% | Buyer, under reverse charge | 9/2025-CT(R), Sch I, S. No. 325; 4/2017-CT(R), S. No. 4 |
| Silk yarn sold to an unregistered buyer, or resold by a trader (5004 to 5006) | 5% | Seller | 9/2025-CT(R), Sch I, S. No. 325 |
| Woven fabric of silk or silk waste, incl. silk sarees (5007) | 5% | Seller | 9/2025-CT(R), Sch I, S. No. 326 |
| Job reeling or twisting for a registered owner | 5% | Job worker | 11/2017-CT(R), S. No. 26(ii)(g) |
| Reeling or twisting for an unregistered owner | 18% | Job worker | 11/2017-CT(R), S. No. 26(vii) |
Source: CBIC Notifications 9/2025, 10/2025 and 15/2025-Central Tax (Rate), in force 22 September 2025; Notification 4/2017-Central Tax (Rate)
Inside a State, 5% is billed as 2.5% CGST plus 2.5% SGST, and 18% as 9% plus 9%.
The line that matters is between raw silk and silk yarn. Reeling cocoons gives you raw silk that hasn't been thrown, and that's still nil. Twisting or throwing it into yarn moves it into headings 5004 to 5006, and that's where 5% starts.
How reverse charge on silk yarn works
S. No. 4 of Notification 4/2017-Central Tax (Rate) lists "silk yarn" supplied by "any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of silk yarn". The recipient is "any registered person". So three things must all be true for reverse charge:
- The goods are silk yarn under 5004 to 5006.
- The seller made that yarn from raw silk or cocoons.
- The buyer holds a GSTIN.
Notification 4/2017-Integrated Tax (Rate) has the same entry, so an inter-State sale to a registered weaver in another State works the same way. The entry hasn't been changed by any of the later amendments to 4/2017-CT(R), up to Notification 06/2024.
What the buyer does. Say a registered master weaver buys 100 kg of silk yarn at Rs 5,000 a kg from a twisting unit. The value is Rs 5,00,000, and the weaver pays 5% of it, Rs 25,000 (Rs 12,500 CGST and Rs 12,500 SGST). That has to be paid in cash. Section 49(4) of the CGST Act lets credit be used only for "output tax", and Section 2(82) leaves reverse charge tax out of output tax. The weaver can then claim the Rs 25,000 as input credit, subject to Section 16.
The buyer also has to:
- Get the date right. Under Section 12(3), the time of supply is the earliest of the date you receive the goods, the date you pay, or the day after 30 days from the supplier's invoice.
- Issue a self-invoice if the twisting unit isn't registered (Section 31(3)(f)), within the time the CGST Rules prescribe, and a payment voucher when you pay it (Section 31(3)(g)).
- Report it as an inward supply under reverse charge in GSTR-3B.
What it doesn't cover. A yarn trader who buys from a twisting unit and resells didn't make the yarn, so the trader charges 5% on the invoice in the normal way. A sale to an unregistered handloom weaver falls outside the entry because column (5) needs a registered buyer, so the twisting unit charges the 5%. The entry speaks of yarn made from raw silk or cocoons; if you spin yarn from silk waste, take advice before you bill it under reverse charge. Our reverse charge guide covers the GSTR-3B entries.
Does your unit need GST registration?
It depends on what you sell.
Reeling units. Cocoons, raw silk and silk waste are all wholly exempt. Section 23(1)(a) of the CGST Act says a person engaged exclusively in supplying goods wholly exempt from tax isn't liable to register, whatever the turnover.
Twisting units selling only under reverse charge. Notification 5/2017-Central Tax exempts from registration persons who only make taxable supplies on which the whole tax is paid by the recipient under reverse charge. A unit whose yarn all goes to registered weavers can stay unregistered.
Twisting units with mixed sales. Once you also sell to unregistered weavers, you're no longer "only" making reverse charge supplies. The registration limit is then tested on aggregate turnover, which under Section 2(6) counts all your taxable supplies, including the reverse charge sales, plus exempt raw silk or silk waste sales. For a supplier dealing only in goods, Notification 10/2019-Central Tax raises the limit to Rs 40 lakh, but it leaves out intra-State suppliers in Telangana and a few other States, where the limit stays Rs 20 lakh. Our registration limit guide lists the States.
Example: a twisting unit sells Rs 90,00,000 of silk yarn to registered master weavers and Rs 15,00,000 to unregistered handloom weavers in FY 2026-27. Aggregate turnover is Rs 1,05,00,000, far above either limit. It must register, charge 5% on the Rs 15,00,000 (Rs 75,000), and let the master weavers pay reverse charge on the Rs 90,00,000 (Rs 4,50,000 between them). Our GST registration service files the application.
Job reelers. Reeling someone else's cocoons for a fee is a service. Section 22(1) sets the limit at Rs 20 lakh (Rs 10 lakh in the special category States), and the Rs 40 lakh goods limit doesn't apply to services.
What happens to your input credit?
Reeling units selling only nil goods get no input credit at all. Section 17(2) of the CGST Act allows credit only for the part of inputs used for taxable supplies. GST on machinery, spares, packing and repairs is a cost you price in.
Twisting units have a less obvious problem. Section 17(3) says the value of exempt supply "shall include supplies on which the recipient is liable to pay tax on reverse charge basis". So for splitting credit, your reverse charge yarn sales are treated like exempt sales, even though 5% is paid on them by your buyer.
Step-by-Step Guide
Splitting Common Credit for a Twisting Unit (FY 2026-27)
List outward sales
Rs 90,00,000 of yarn to registered weavers (reverse charge) and Rs 15,00,000 to unregistered weavers (forward charge, 5%). Total Rs 1,05,00,000.
Treat reverse charge sales as exempt
Section 17(3) of the CGST Act counts the Rs 90,00,000 as exempt supply for this purpose. Only the Rs 15,00,000 is taxable.
Apply the ratio to common credit
GST on twisting machine spares, packing, repairs and other common inputs is Rs 1,40,000. Taxable share: 15/105 of it, which is Rs 20,000.
Reverse the rest
Rs 1,20,000 can't be used. Rule 42 of the CGST Rules sets the exact monthly and annual working; the ratio here is the idea behind it.
Source: CGST Act, Sections 17(2) and 17(3); CGST Rules, Rule 42
Keep separate records of inputs used only for the forward charge sales. Credit on those isn't split. Our Rule 42 and 43 reversal guide shows the full formula, and our GST return filing service runs the monthly returns.
Job reeling: 5% or 18%?
Many small reelers work on cocoons that belong to someone else and get paid per kg of raw silk. Under Notification 11/2017-CT(R), S. No. 26, as substituted by Notification 15/2025 from 22 September 2025, "job work in relation to textiles and textile products falling under Chapters 50 to 63" is 2.5% CGST plus 2.5% SGST, so 5%.
The catch is the word "job work". Section 2(68) of the CGST Act defines it as a process on goods belonging to another registered person. If the cocoon owner isn't registered, the work isn't job work as defined. It falls under item (vii) of the same entry, "any treatment or process on goods belonging to another person", at 9% CGST plus 9% SGST, so 18%. Before you quote a rate, ask for the owner's GSTIN. Our handloom weavers guide covers the same job work entry from the weaving side.
Income tax: 44AD and paying cocoon growers
Section 44AD. For FY 2025-26, a resident individual, HUF or partnership firm (not an LLP) can declare 6% of turnover received by bank transfer, UPI or cheque (by the return due date) and 8% of the rest as profit, under Section 44AD of the Income-tax Act 1961. The limit is turnover of Rs 2 crore, or Rs 3 crore if cash receipts are within 5% of turnover. Raw silk sales are nil for GST but still count in turnover for income tax. From 1 April 2026 the same scheme is Section 58 of the Income-tax Act 2025, with the same rates and limits.
Example: a proprietor reeler sells Rs 75,00,000 of raw silk and silk waste in FY 2025-26: Rs 50,00,000 by bank and Rs 25,00,000 in cash. Cash is a third of turnover, so the limit is Rs 2 crore, and Rs 75 lakh is within it. Deemed profit is 6% of Rs 50,00,000 (Rs 3,00,000) plus 8% of Rs 25,00,000 (Rs 2,00,000), so Rs 5,00,000. Move the cash sales to UPI and it drops by Rs 50,000, to Rs 4,50,000. Our Section 44AD guide covers the five-year lock-in if you later opt out.
Cash for cocoons. If you work out actual profit from books, Section 40A(3) of the 1961 Act disallows an expense where cash paid to one person in a day exceeds Rs 10,000. From 1 April 2026 the same rule is Section 36(4) of the Income-tax Act 2025. The Rules carry exceptions, and whether a given cocoon purchase fits one depends on who you pay and what the produce is. The simple fix is to pay growers by bank transfer or UPI at the market. See our Section 40A(3) guide.
Common mistakes in silk reeling and twisting units
- Charging GST on raw silk. Raw silk that hasn't been thrown is nil. A 5% line on the bill collects tax that isn't due.
- Charging 5% on yarn sold to a registered weaver. If you made the yarn, the weaver pays under reverse charge. Your invoice should show the tax as payable by the recipient.
- Billing unregistered weavers under reverse charge. The entry needs a registered buyer. For an unregistered weaver, you charge the 5%.
- Claiming full credit while selling under reverse charge. Section 17(3) treats those sales as exempt for the credit split.
- Quoting 5% for job reeling without checking the owner's GSTIN. For an unregistered owner, it's 18%.
- Leaving nil raw silk sales out of income tax turnover. They count for 44AD and the audit limits.
How Tax Garden helps silk units
We start by mapping what you actually sell: raw silk, yarn to registered weavers, yarn to unregistered weavers, or job work. That tells us whether you need a GSTIN at all. If you do, we register you, set up invoices that show reverse charge correctly, and work out the Rule 42 credit split every month. At year end we test 44AD against your real margin and file your ITR through our ITR filing service. Call or WhatsApp us on 9640290977.
Related reading: GST for handloom saree shops, where your yarn ends up, and GST for cotton spinning mills, which covers the other yarn headings.
