In a report, the New York-based group said that police have been using a "discriminatory" amendment to the penal code passed by parliament in 2007 which arbitrarily criminalises "imitating the opposite sex."
Transgender women are individuals who are born male but identify themselves as female.
The arbitrary and ill-defined provisions of the law have allowed numerous abuses to take place against them, said the 63-page report based on interviews with 40 transgender women, as well as with interior ministry officials, lawyers, doctors, and members of civil society.
Kuwaiti police have a free rein to determine whether a person’s appearance constitutes "imitating the opposite sex," without any specific criteria being laid down for the offence, it said.
Transgender women reported being arrested even when they were wearing male clothes and then later being forced by police to dress in women’s clothing.
In some cases documented by Human Rights Watch, transgender women said police arrested them because they had a "soft voice" or "smooth skin."
"No one – regardless of his or her gender identity – deserves to be arrested on the basis of a vague, arbitrary law and then abused and tortured by police," said Sarah Leah Whitson, HRW’s Middle East director.
"The Kuwaiti government has a duty to protect all of its residents, including groups who face popular disapproval, from brutal police behaviour and the application of an unfair law," she said in a statement.
Abuses include degrading and humiliating treatment, such as being forced to strip and paraded around police stations, being forced to dance for officers, sexual humiliation, verbal taunts and intimidation, HRW said.
"In several cases, Human Rights Watch found that police officers took advantage of the law to blackmail transgender women into sex," the report said.
Redress for these violations was difficult for fear of retribution and re-arrest, said the rights watchdog.
"HRW calls on the Kuwaiti government to repeal the amendment to article 198, criminalising imitating the opposite sex," the report said.
Pending repeal of the law, the interior ministry should issue a moratorium on arrests of individuals and the government also should work to protect transgender individuals, it said.