written by Khatabook | September 13, 2021

Impact of GST Rate On Furniture Manufacturers

Any country's industrial sector can rightfully be regarded as its economic backbone. India has emerged as one of the fastest-growing manufacturing sectors globally, as indicated by a 7.9% rise in Gross Value Added (GVA). Small businesses that either pay less tax or do not fall under the excise duty category dominate the furniture sector. They only paid Value Added Tax or VAT, which ranged from 12.5% to 14.5%. The finished goods generated by wooden furniture makers would be taxed at a rate of 12% under GST, rather than the previous average VAT rate of 12.5%, following the meeting held by the GST Council on 18 May 2017. 

The GST Council imposed a tax on goods and services under the Goods and Services Tax (GST) Act on May 18, 2017. In this post, we'll look at how the furniture GST rate affects the furniture industry and the effects on furniture manufacturers in general.

GST Rate on Wooden Product Supplies:

  

Wooden product supplies

Subjected to GST rates

Goods and Services Tax or GST on wooden furniture, wood pulp and bamboo pulp

12% GST

Any timber furniture and decorations used as tableware or kitchenware

12% GST 

ST on furniture items such as wooden boxes, drums, crates, and the wood used to make umbrellas, walking sticks, tool handles etc.

12% GST

Residual lyes from the manufacture of wood pulp, whether saturated or not, de-sugared or chemically processed, such as lignin sulphonates excluding tall oil

18% GST

Wood tar, timber naphtha, brewers' pitch, vegetable pitch, timber tar oils, and similar compositions based on resin, resin acids, or a vegetable pitch and wooden creosote

18% GST

Laminated wood, plywood, fibre wood, Cane furniture etc., that resemble wood or are woody

28% GST

Wood in the form of chips, sawdust, or garbage

5% GST

Firewood and wood charcoal

Exempt from the GST

Instead of the current average VAT rate of 12.5%, the final commodities manufactured by wooden furniture will be taxed at 12% under GST. The plywood price has increased significantly from the previous VAT of 5-6% to 28% under GST.

E.g., All objects made of wood, such as tables, sofa sets, wardrobes, chairs, coffee tables, and so on, that a local furniture store manufactures would be subjected to such GST.

For Rs.18,000, a buyer purchases a wardrobe from a store. In this situation, plywood was used to construct the wardrobe, which cost the furniture manufacturer Rs.8000. Let's have a look at the tax liability under the VAT and GST on wooden furniture systems.

VAT-related tax liability

The tax on a finished object like a wardrobe is Rs. 2,250. (i.e., 12.5%of 18,000)

ITC available on material purchases = Rs.540 (6% of 9,000)

As a result, the net tax liability equals Rs.1,710 (2250-540)

GST on furniture in India - Tax liability

The tax on a finished object like a wardrobe is Rs. 2,160. (i.e., 12% of 18,000)

ITC available on material purchases = Rs.2520 (28% of 9,000)

As a result, the net tax liability equals Rs.360 (2,520-2160).

The furniture producer can use the ITC available on the purchase of plywood for Rs. 2520 to settle his/her GST liability for the total amount of Rs. 2,160.

Impact of GST Rate on Furniture Manufacturers

Let's take a look at how GST on furniture affects various segments:

  • Excise duty, which was determined using various ways under the previous tax structure, including Specified duty, Ad Valorem duty, Value-based on Retail Sale Price, and Tariff Value, has now been simplified and is easy to calculate with GST. Through GST, transaction-based valuations can be exclusively estimated.
  • GST is a simple tax that also helps to reduce the number of indirect taxes. There will be no hidden taxes, and the cost of conducting business would be cheaper because GST is not a burden to registered shops.
  • The single base for collecting GST for the Centre and the States will amalgamate many central and state taxes, allowing them to charge one tax instead of 16 taxes.
  • Manufacturers had to pay an extra 25-26% in manufacturing expenses under the previous tax regime, owing to the effect of cascading taxes like excise duty (12.5%) and VAT (14.5%) on the grounds of taxing two separate taxable events. However, under GST, a tax would be imposed on a single taxable occurrence. As a result, the GST rate on furniture aids in making furniture items become cheaper, resulting in increased sales and giving the concerned parties a firm foothold in an increasingly competitive market.

Benefits of the GST for Manufacturers

The following are some of the advantages of the impact of furniture GST on manufacturers: 

  • Based on the VAT principle, GST will be imposed solely at the final point of consumption, not at numerous locations. This will assist in the removal of economic inequalities and the creation of a single national market.
  • According to research, the adoption of GST will lower the cost of goods and services in the long run.
  • The fact that most formerly non-creditable taxes on interstate supplies are now creditable is crucial in driving down manufacturing costs such as entry tax, central sales tax, etc. 
  • Set-offs would now be possible, easing the load on the manufacturing sector and ensuring a consistent flow of credit. Because most taxes have been subsumed under the GST system, other trading channel players, such as retailers and distributors, will now be able to claim credit for the taxes they have paid.
  • With the weight of indirect tax on manufacturers reduced, the furniture manufacturing industry will focus more on the quality element of the manufacturing process rather than just the marketing, filling quality gaps in a country that desperately needs to upgrade its goods.

Positive impact of present GST regime

  • Because taxes on products and services are stated separately for one transaction, invoices are now more thorough. With the advent of GST, there will only be one rate to write, which would aid GST on furniture items.
  • GST will also aid in the development of a transparent and anti-corruption tax administration.
  • Previously, the majority of supply chain management was based on state-by-state taxes. Businesses are now compelled to re-engineer their supply chains under the GST's "one-nation-one tax" idea, which will drive them to focus on improving company efficiency and operability instead.
  • GST is supported by the Goods and Services Tax Network (GSTN), a fully integrated tax infrastructure that handles all tax aspects.
  • If a single furniture manufacturer operated many facilities in the same state, each factory had to be registered separately. Under the GST system, a single taxable producer would only need to file for a single registration, regardless of the number of factories in the state. This implies that there will be less paperwork and bureaucratic interference at each stage, resulting in improved business management due to the GST rate on furniture in India.

Impact of elimination of entry tax

  • The elimination of the entry tax will help transit goods such as furniture by road within due time.
  • Manufacturing companies with a turnover of fewer than INR 75 lakhs can now take advantage of the GST Composition Scheme at a rate of 2%. Manufacturing companies with a turnover of less than INR 75 lakh are now eligible for the GST Composition Scheme (at a rate of 2%), which provides some tax relief to the key stakeholders, making it feasible with GST on furniture.

Impact of Tax exclusions

  • As a result of the various exclusions granted by the Centre and the states, the final price in each state varies. Exemptions would be similar between the Centre and the states under the GST framework, ensuring that duty rates are uniform.
  • Earlier, different tax assessment authorities were responsible for different taxes, such as VAT, sales tax, service tax, Central Excise, etc. This not only made the process confusing, but it was also incredibly time demanding, leaving manufacturers dealing with tax questions they didn't understand, negatively impacting their business. 
  • Rather than having different authorities designated to each form of tax, assessments will now be carried out in a three-tiered manner. State authorities will handle state Goods and Services Tax (SGST) assessments. 
  • In contrast, Central Goods and Services Tax (CGST) and Integrated Goods and Services Tax (IGST) assessments would be handled by central authorities. It would result in a more effective tax assessment system that would save time and help furniture manufacturers cope with the process more efficiently without dealing with a slew of tax-related questions and their ramifications.
  • Even if there is no GST, zero-rating can provide input duty relief, but it does not provide relief for all duties. The zero-rating system will be more extensive with GST.

Also Read: Types of GST in India - What is CGST, SGST and IGST?

Drawbacks of the GST on Manufacturers

However, not everything is perfect; there are a few issues about this newly designed tax method for manufacturers, some of which are described below:

  • Reverse charge, which was previously limited to specific services, will now apply to items as well. As a result of the increasing costs paid by the users of goods/services rather than the suppliers, the manufacturing sector will be severely pressured.
  • Manufacturers will have to increase their working capital requirements because advance payments, stock transfers, and branch transfers are taxed under GST.
  • With GST striving for improved tax compliance, businesses will inevitably need to revamp and streamline their current transactions. Thus, in turn, necessitates the allocation of additional resources and funds to these compliance efforts.
  • At first, many companies may be confused with implementing the GST rate on furniture in India. This can result in delays in managing the financial aspects of the furniture manufacturing company. The need for realigning business objectives is required to adhere to the furniture GST rate.

Rate of GST on Furniture Made of Iron or Steel

The cost of making iron and steel furniture has increased as a result of the GST. Formerly, the average VAT rate on iron or steel furniture was 12.5%, but under the GST, every type of furniture other than hardwood furniture will be taxed 28%. The GST rate on furniture is imposed on iron and steel at 18%, compared to the previous VAT rate of 5%, independent of the steel qualities. Iron and steel furniture manufacturers can claim an Input Tax Credit ITC) for the tax they paid on imports.

Example:

A consumer acquires a dining table from the business for Rs. 25,000. The steel dining table was made with steel purchased for Rs. 12,000 by the furniture manufacturer.

VAT-related tax liability

The tax on a finished object like a dining table is Rs. 3125. (i.e., 12.5% of 25,000)

ITC available on material purchases = Rs.600 (5% of 12,000)

As a result, the net tax liability equals Rs.2525 (3125 – 600).

GST-related tax liability

The tax on a finished object like a dining table is Rs. 7000. (i.e., 28% of 25,000)

ITC available on material purchases = Rs.2160 (18% of 12,000)

As a result, the net tax liability equals Rs.4840 (7000-2160)

Conclusion

Manufacturers such as furniture manufacturers have gained many benefits from GST as compared to the old rates charged as VAT. Although the impact of GST Rate on Furniture Manufacturers is more on wooden furniture manufacturers than iron or steel furniture manufacturers, it has made business functioning easier. Therefore, if you want to start a furniture manufacturing business, understanding GST for furniture is necessary. For accounting purposes, you can download the Khatabook app for ease of doing business, where the concept of GST is made much easier for you.

FAQs

1. What is the GST on furniture items?

The wooden furniture GST rate is 12%, and the GST on furniture made of up metal is 28%.

2. What is the GST rate on plywood?

The plywood GST rate is 12%.

3. What is the GST impact on furniture?

Impact of GST Rate on Furniture Manufacturers is more on wooden furniture manufacturers over iron or steel furniture manufacturers.  Please read the article for a better understanding.

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