Leather and Textile Sector: Navigating the Statutory Convergence of Budget 2026–27 and India’s New FTA Regime

The regulatory landscape of Indian international trade has undergone a paradigm shift in the last few years, with its effects becoming increasingly visible in the early months of 2026 as well. The conclusion of the India-EU Trade Deal completes India’s strategic “Golden Quadrilateral” of Free Trade Agreements (‘FTAs’) along with the existing agreements with the United Kingdom (‘UK’), Australia, and European Free Trade Association (‘EFTA’).

While the diplomatic achievements are evident, the Union Budget 2026–27 (‘Budget’) also marks a robust transition from revenue-centric customs framework to an export-facilitation model. 

This article highlights key fiscal amendments in the leather and textile segment under the Budget and examines whether the harmonization of fiscal statutes and FTAs entered by India creates a streamlined pathway for export, or a labyrinth of compliance risks.

Budget Changes for Leather and Textile Sectors

The Budget comprises a set of fiscal measures for the textile and leather sectors. A long list of components used in the manufacturing of textile and leather garments,[1] as well as footwear and other leather goods[2] have been granted extension of customs duty exemptions under Notification No. 45/2025-Cus. (‘Amended Notification’) till 31st March 2028. Such preferential treatment is applicable to inputs imported exclusively for the purposes of export of the finished goods such as textile or leather garments, leather or synthetic footwear, shoe-uppers, or other leather products. 

In the case of textile and leather garments, the benefit applies to items such as collar stays, embroidery motifs or prints, laces, sequins, wet white leather, antitheft devices (including labels, tags and sensors), and velcro tape. For leather or synthetic footwear, shoe-uppers, and other leather goods, the exemption extends inter alia to artificial fur and alarm tags, wet-blue chrome-tanned leather, a range of lining and interlining materials (including synthetic, PVC, PU, and textile variants), as well as thermoplastic sheets.

Further, the Amended Notification has extended the period within which the manufactured goods using the said inputs must be exported, from six months to twelve months from the date of import of the said inputs. Such extension is also in alignment with the time period specified for utilisation of goods under Customs (Import of Goods at Concessional Rate of Duty or for Specified End Use) Rules, 2022.[3]

Market Overview – Exports of Textile and Apparel from India

India is a labour-intensive economy and the 6th largest global exporter of textiles and apparel, with a share of about 4 per cent in world exports in this segment.[4] Recent fiscal measures, including lower GST rates on man‑made fibres, yarn and key labour‑intensive goods such as intermediate leather products, reflect a broader effort to make the sector more competitive in relation to other major players in the market such as Bangladesh, China, or Vietnam.[5]

Despite such initiative, export performance in the last fiscal year remained moderate, with textiles growing at an average annual rate of 7.8 per cent and total textiles and apparel exports rising only modestly from USD 35.87 billion in FY24 to USD 37.75 billion in FY25.[6]

In light of the same, widening duty‑free access to a larger set of inputs can be seen a deliberate step towards reducing production costs, improving export preparedness and strengthening India’s role across both natural‑fibre and man‑made‑fibre supply chains.

Harmonising Export Incentives with Import-Linked Benefits

The changes in the Amended Notification support long‑term investment in export‑oriented manufacturing and enables businesses to align their operations with India’s broader agenda of trade facilitation, which increasingly emphasises competitiveness, integration with global supply chains and smoother access to international markets.

India’s new age FTAs with the UK[7], Australia[8] and the EFTA[9] offer zero duty access for many finished textile and leather products. Exporters, therefore, stand to benefit at both legs: cheaper inputs domestically and tariff‑free entry for finished products abroad. The Joint Statement issued by the USA and India also indicates such exemptions/concessions to be accorded inter alia to Indian textile market.[10]

Regulatory Hurdles in Global Supply Chains and Domestic Compliance

The aforesaid policy construct, however, comes with some regulatory challenges.

Certain FTAs require Indian exporters to meet stricter rules of origin, including a ‘qualifying value content’[11] or a minimum value addition requirement, to qualify as an originating good of India. In the context of the recent India-U.S. trade deal, the incorporation of similar rules of origin is likely. Further, several FTAs concluded by the U.S.[12] require exporting parties to satisfy the ‘substantial transformation’ test[13] (change in name, character and use of the final product) for a good to qualify as ‘originating’ in order to be eligible for the preferential benefit. This standard is comparatively a much stringent criteria than other rules of origin such as change in tariff heading, which may impose an additional compliance burden on Indian exporters.

Additionally, recent FTAs entered into by India expose manufactures and exporters to non-tariff barriers in the partner countries, such as certification rules, licensing constraints, and climate-based regulatory requirements which necessitates equal consideration.

At the domestic front, given that the essential pre-condition for availing the exemption requires that the inputs are intrinsically linked to their usage in manufactured goods meant for export, Indian importers must exercise caution while establishing a link to the exported products qua the inputs used.

Way Forward

The industry is therefore, confronted with a critical question: at what point does the fiscal benefit of cheaper inputs get outweighed by the risk of disqualification from FTA benefits?

The need of the hour is to establish a delicate balance. In case the manufacturers rely too heavily on cheaper duty-free imported inputs, the threshold for domestic value addition on the finished goods meant for export would become much higher. In some cases, finished goods may also lose their originating status and therefore, become ineligible to claim the FTA benefits abroad.

Before embarking on an aggressive pursuit of duty-free imports, exporters in the leather and textile sectors must undertake a rigorous assessment of their sourcing practices and production processes with care without heavily relying upon commercially attractive imports. A conscious approach must be taken to avoid inadvertent erosion of the preference status due to any non-compliance with the rules of origin.

Conclusion

The Budget has undeniably signalled the government’s intent to integrate into global supply chains, opening the doors for textile and leather industry to engage in competitive manufacturing. However, the intersection of these fiscal incentives with the rigorous rules of origin under the new-age FTAs creates a compliance dilemma, compelling Indian exporters to be more cautious. The adherence to the rules of origin will decide whether Indian goods are in fact “Indian” so as to enter partner markets on preferential terms. Given the divergence in the criteria of rules of origin, a “one-size-fits-all” export strategy would be legally perilous even in the short term.

[The authors are Partner, Senior Associate and Associate, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

[1] S. No. 142 of Notification was amended vide Notification No. 02/2026 dated 01.02.2026 

[2] S. No. 143 of Notification was modified to include “shoe uppers” vide Notification No. 02/2026

[3] Circular No.18 /2022-Customs dated 10.09.2022, as available here (last accessed on 06.02.2026)

[4] Economic Survey 2025-26

[5] Trade Map Export Data, Internation Tade Centre, as available here (last accessed on 06.02.2026) 

[6] Economic Survey 2025-26

[7] India – United Kingdom Comprehensive Economic and Trade Agreement (CETA), Ministry of Commerce and Industry, as available here (last accessed on 06.02.2026).

[8] India-Australia Economic Cooperation and Trade Agreement (INDAUS ECTA), Ministry of Commerce and Industry, as available here (last accessed on 06.02.2026).

[9] Trade and Economic Partnership Agreement between the Government of the Republic of India and the Governments of EFTA States, Ministry of Commerce and Industry, as available here (last accessed on 06.02.2026).

[10] United States-India Joint Statement – The White House, as available here 

[11] QVC is the ‘qualifying value content’ of a good, expressed as percentage. Most FTAs such as the India-Australia ECTA, require a QVC of atleast 35-45% for certain goods to qualify as an originating good. 

[12] Rules of Origin for US-Jordan FTA and US-Oman FTA, as available here and here (last accessed on 06.02.2026), 

[13] This principle was established in the case of United States v. Gibson-Thomsen Co. [27 CCPA 267, C.A.D. 98 (1940)]