Impact of GST Rate on Furniture Manufacturers

The revised GST rates on the furniture manufacturing sector in India has had several positive and negative impacts. Here are some major facts to look at.

India’s industrial sector holds the rightful status of being the “backbone of the economy,” with the final value of finished products shaping the foundation of the country’s financial assets. Within this economic landscape, the furniture manufacturing sector plays a significant role. On May 18th, 2017, the GST council made adjustments to the GST rates for various goods and services. This article delves into the impact of these changes on the furniture manufacturing sector.

Wooden Furniture Manufacturing Sector

The tax structure for wooden furniture manufacturing has undergone significant changes, directly impacting the cost dynamics of both wooden furniture and plywood materials. Manufacturers now have the option to claim Input Tax Credit (ITC) on taxes paid during the purchase of raw materials, particularly plywood. This serves as the primary method to alleviate the tax liability under the revised Goods and Services Tax (GST) structure. These alterations have brought about a shift in the economic landscape of the sector. 

The key changes include:

Category	GST Rate	Previous VAT Rate Range
Wood pulp, wood boxes, bamboo pulp, and related raw materials	12%	VAT: 4 to 5%
Wooden furniture and decorative items	12%	VAT: 0 to 12.5%
Residual items from the wood manufacturing process, wood tar, resin acids, vegetable pitch, etc.	18%	VAT: 4 to 5%
Plywood, cane furniture, and other look-alikes of actual wooden materials	28%	VAT: 5 to 12.5%
Waste of wood, wood chips, etc.	5%	VAT: 4 to 5%

Impact on Iron and Steel Furniture Manufacturing Sector

The increasing preference for iron and steel furniture due to its lightweight and enhanced mobility has become a trend in contemporary furnishing. However, the prices of such furniture are experiencing an upswing attributed to the escalation in Goods and Services Tax (GST) rates. A comprehensive overview of the revised rates from the 2017 model includes:

– Iron and steel finished furniture products: 28% GST (previously 12.5% VAT)

– Raw materials for making iron and steel furniture: 18% GST (previously 5% VAT on average)

Manufacturers have the opportunity to avail Input Tax Credit on 18% of iron and steel furniture items within the overall GST structure. While this may not result in an overall loss structure, it does contribute to an increase in the manufacturer’s tax liability.

Benefits Of New GST Structure For Furniture Manufacturers

The implementation of the Goods and Services Tax (GST) by the Indian government has brought about positive impacts on manufacturing businesses throughout the country, including the furniture manufacturing sector. While the effects may not be immediately apparent, the new GST rates have contributed to eliminating fraudulent activities and money laundering within the industry. 

Here are some benefits that furniture manufacturing companies are experiencing due to the new GST structure:

1. Simplified Transaction Values: The GST system has simplified the determination of transaction values. Complex features like tariff value, specified duty, and value-based retail sale price under excise duty have been replaced with a more straightforward approach.
2. Elimination of Hidden Taxes: The introduction of GST has eliminated hidden taxes, resulting in reduced indirect taxes. This is particularly advantageous for small and medium-sized enterprises, and manufacturers no longer have to bear extra taxes.
3. Cheaper Manufacturing Items: GST rates for manufacturing items have made them more cost-effective for manufacturers. The simplified tax structure, without the complexities of VAT and excise duty, benefits businesses.
4. Potential Price Reductions: According to sources, the implementation of GST is expected to lead to a decrease in the prices of furniture in the long run. Small businesses can benefit from voluntary registration under GST to expand their market reach.
   
5. Creditable Taxes: Non-creditable taxes have become creditable for manufacturers, leading to a decrease in the initial cost and tax structure. This encourages manufacturers to focus on providing high-quality products.
6. Emphasis on Quality: With reduced indirect taxes, furniture manufacturers are inclined to prioritize the supreme quality of items over elaborate marketing techniques. The finished products themselves become a testament to the quality of manufacture.
7. Reduction in Fraud and Corruption: GST is anticipated to reduce fraud and corruption in the manufacturing sector, enhancing transparency and compliance.
8. Efficient GST Network Handling: The Goods and Services Tax Network (GSTN) oversees GST evaluation, ensuring that all tax structures are managed with a focus on transparency. This helps honest manufacturers expand their businesses.
9. Simplified Business Expansion: A single manufacturer can easily expand their business by establishing multiple companies, as they only need to manage GST payments single-handedly for all business transactions.
10. Tax Relief Features: Manufacturers with a turnover of less than the prescribed limit  can opt for a 2% tax redemption under the GST Composition Scheme, providing them with tax relief.

Drawbacks of The Current GST Structure For Furniture Manufacturing Businesses

Despite the positive aspects of the new GST structure, there are significant drawbacks for furniture manufacturing businesses. Several existing loopholes could lead to undue losses for manufacturers over time. Here are crucial areas of concern regarding the current GST rules:

1. Impact of Reverse Charges: The application of reverse charges on various furniture items is a concern for manufacturing businesses. While the suppliers may not suffer significantly, users and consumers may face higher prices. Manufacturers, as intermediaries, could bear the brunt of these losses.
2. Increased Capital Requirements: The new GST structure necessitates manufacturers to increase their capital and assets. Advance payments and transfers under the new scheme contribute to higher store values. For example, a manufacturer who previously paid INR 1000 for raw materials may now have to pay at least INR 1090, including the GST value.
3. Pressure on Pricing Structures: Manufacturers face constant pressure to incorporate the impact of GST on current pricing structures. The government’s intention to increase the purchasing capacity of users through GST puts the onus on manufacturers as intermediaries, requiring them to manage greater monetary values in their business prospects.
4. Organizational Re-Alignment: Furniture manufacturers need to organize and re-align their business objectives to leverage the benefits of GST. This may involve adopting advanced technologies for more effective production. As a result, their investment plans must accommodate the evolving pricing standards.

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Revised GST Rates On Furniture Manufacture- A Blessing Or A Boon?

The revised GST rates have significantly influenced manufacturing businesses, and furniture manufacturers are experiencing noticeable consequences. 

While the overall impact is largely positive, leading to potential long-term success, there are challenges. The current GST structures appear more complex compared to the previous VAT system. Manufacturers are finding it challenging to navigate the path toward profit maximization within the current pricing structure. As a result, the journey to success seems uncertain and less clear.

Conclusion

While the furniture manufacturing business may face initial setbacks, these challenges are expected to be temporary. For a deeper understanding of the current GST fluctuations and their impact on your furniture business, consulting experts at Vakilsearch is recommended. 

It’s worth noting that the positive aspects of GST, particularly for wooden furniture manufacturers, outweigh the challenges posed to iron and steel furniture builders. With a heightened focus on GST rates and a move away from complex tax structures, the overall scenario is poised to improve.