Impact of GST Rate on Furniture Manufacturers

The GST Council on 18 May 2017, had announced a tax on certain goods and services under the Goods and Services Tax (GST) Act. The new tax regime has efficaciously replaced the erstwhile VAT taxes on goods and services. In this article, we will share some insight into the impact of the GST rate on furniture items and supplies and what impact this is going to have on furniture manufacturers in general.

GST Rate on Wooden Furniture Supplies

In order to understand the price of wooden furniture, one ought to first know the GST rate on wooden product supplies.

  • A rate of 12% GST is levied on articles like wood boxes, drums, crates and the wood utilised in making umbrella, strolling sticks and tool handles, or anything similar.
  • A rate of 12% GST is levied on wood pulp and bamboo pulp.
  • A rate of 18% GST is levied on residual lyes from the manufacturing of wood pulp, whether concentrated or not, de-sugared or chemically treated, such as lignin sulphonates, however, excluding tall oil.
  • A rate of 18% GST is levied on wood tar, vegetable pitch, timber naphtha, brewers’ pitch, timber tar oils and similar preparations based on resin, resin acids or on a vegetable pitch and wooden creosote is 18%.
  • A rate of 12 GST is levied on any wooden furnishings and wooden decorates used as tableware or kitchenware (besides that notified at 28% under GST).
  • A rate of 28% GST is levied on fibre wood, plywood, laminated wood and other materials bearing a resemblance of wood or being woody in nature.
  • A rate of 5% GST is levied on wood in chips, sawdust or waste of wood.
  • A rate of 28% GST is levied on cane furniture.
  • GST rate on firewood or wood charcoal is exempt.

Instead of the erstwhile VAT of 12.5%, the final goods which are manufactured by furniture manufacturers are now levied at the rate of 12% under GST. Mainly for manufacturers of wooden furniture items, plywood is used. Major growth has been made within the price of plywood from the earlier VAT of 5-6% to 28% under GST. This has resulted in an increase in the price of furniture which is made of wood (timber). However, furniture manufacturers can now claim the ITC (Input Tax Credit) on the tax paid for purchasing plywood.

Example:

A local furniture shop manufactures items made from wood (timber), such as tables, chairs, sofa sets, cup-boards, coffee-table, beds etc.

A customer purchases a sofa set from the shop for Rs. 20,000. The material, in this case, being plywood, was used in the making of the sofa set, which cost the furniture manufacturer Rs. 10,000.

Now, comparing the tax liability of the wooden item (sofa set) both under VAT and GST, we get the following results:

Tax liability under VAT

Tax levied on the sofa set (finished good) = Rs. 2,500 (i.e. 12.5% of 20,000)

ITC available on the purchase of plywood (material) = Rs. 600 (6% of 10,000)

Therefore, net tax liability = Rs. 1,900 (2,500 – 600)

Tax liability under GST

Tax levied on the sofa set (finished good) = Rs. 2,400 (i.e. 12% of 20,000)

ITC available on the purchase of plywood = Rs. 2,800 (28% of 10,000)

Therefore, net tax liability = Rs. 400 (2,800 – 2,400)

The furniture manufacturer can dispose its tax liability for the entire amount of Rs. 2,400 under GST through claiming the ITC available on the purchase of plywood (Rs. 2,800).

GST Rate on Iron or Steel Furniture

Iron and steel furniture production has also become expensive under GST. The earlier average VAT applicable to iron or steel furniture was 12.5%, while under GST, any article of furniture, other than wooden furniture, will be taxable at the rate of 28%.

As compared to the erstwhile VAT of 5%, GST is levied on iron and steel at the rate of 18%, regardless of the steel characteristics. Manufacturers of iron and steel furniture will be allowed to claim ITC of the tax paid by them on imports.

Example:

A customer purchased a steel almirah for Rs. 50,000 from a furniture shop. The furniture shop has a wide section, where only iron and steel furniture are manufactured by the shop. The furniture manufacturer purchased steel worth Rs. 30,000 for the making the steel almirah. Now, comparing the tax liability of the steel item (almirah) both under VAT and GST, we get the following results:

Tax liability under VAT

Tax levied on the almirah (finished good) = Rs. 6,250 (i.e. 12.5% of 50,000)

ITC available on the purchase of steel (material) = Rs. 1,500 (5% of 30,000)

Therefore, net tax liability = Rs. 4,750 (6,250 – 1,500)

Tax liability under GST

Tax levied on the almirah (finished good) = Rs. 14,000 (i.e. 28% of 50,000)

ITC available on the purchase of steel (material) = Rs. 5,400 (18% of 30,000)

Therefore, net tax liability = Rs. 8,600 (14,000 – 5,400)

Conclusion

The rate of tax under GST on furniture, whether wood, iron, or steel, is much higher in comparison to the earlier rates of what was charged as VAT. Hence, under GST, there may be an increase in the tax liabilities of iron or steel manufacturers. GST is expected to be more worthwhile for wooden furniture manufacturers, however, not so much for iron or steel furniture manufacturers.



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