The Chit Funds (Amendment) Bill,2018

Impact of GST Rate on Furniture Manufacturers

The tax rate on certain goods and services under GST was declared by the GST council in the meeting held on 18th May 2017. We will be doing a complete analysis of the changes in the tax rate for different kind of furniture manufacturers in this article. There are a substantial amount of changes in the tax rate from the current VAT rate being charged.

Manufacturers of Wooden Furniture

In order to understand the costing for wooden furniture, an understanding of changes in the tax rate on wood is essential.

Particulars	GST Rate	VAT Rate
Articles like wooden boxes, drums, crates. The wood used in making an umbrella, walking sticks and tool handles or anything similar	12%	An average 4-5%
Wood pulp, bamboo pulp	12%	An average 4-5%
Residual lyes from the manufacture of wood pulp, whether or not concentrated, de-sugared. Or chemically treated, including lignin sulphonates, but excluding tall oil	18%	An average 4-5%
Wood tar; vegetable pitch; wood naphtha; brewers’ pitch; wood tar oils and similar preparations based on resin, resin acids or on a vegetable pitch and wood creosote	18%	An average 4-5%
Any wooden furniture and wooden decorates used as tableware or kitchenware (except that notified @28 % under GST)	12%	An average 12.5%
Fibrewood, plywood, laminated wood and other materials having an appearance of wood or being woody in nature	28%	Others –  An average 12.5%
Firewood or wood charcoal	Exempt	Exempt
Wood in chips, sawdust or waste of wood	5%	An average 4-5%
Cane furniture	28%	An average 4-5%

The final goods produced by the manufacturer of wooden furniture will be taxed at the rate of 12% under GST instead of the current average VAT rate of 12.5%. Plywood is used mainly in the manufacture of most of the wooden furniture articles. There has been a significant increase in the rate of plywood from the current average VAT rate of 5-6% to 28% under GST. Due to the increase in the tax rate on plywood, there are significant chances of increase in the cost of wooden furniture. Although the manufacturer can claim the ITC on the tax paid for purchasing plywood in order to make the furniture.

For Example:

XYZ furniture produces wooden articles like a sofa, chair, cupboard, and tables. G purchased a table from XYZ for Rs 20,000.  XYZ had purchased plywood for Rs 10,000 for making the table.

Tax liability under VAT

Tax on the table (final product)	Rs 2,500 (12.5% of 20,000)
ITC available on purchasing plywood	Rs 600 (6% of 10,000)
Net tax liability	Rs 1,900 (2500 – 600)

Tax liability under GST

Tax on the table (final product)	Rs 2,400 (12% of 20,000)
ITC available on purchasing plywood	Rs 2,800 (28% of 10,000)
Net tax liability	Rs 0 (2,400 – 2,400)

XYZ can dispose its tax liability for the whole amount of Rs 2400 under GST by using the ITC available on the purchase of plywood (2,800).

Manufacturer of Iron or Steel Furniture

Iron or steel furniture are also expected to get expensive under GST. Current average VAT rate applicable on iron or steel furniture is 12.5% whereas under GST except for wooden furniture, any other articles of furniture would be charged tax at the rate of 28%.

GST will be charged on iron and steel@18% irrespective of the characteristic of the iron or steel in comparison with the average VAT rate of 5%. ITC will be available to the manufacturers @18% of the iron or steel purchased under GST.

For Example:

X purchased a steel almirah for Rs 50,000 from ABC furniture. ABC furniture has a major section producing only iron and steel furniture. ABC had purchased and used steel worth 30,000 for making the furniture.

Tax liability under VAT

Tax on the table (final product)	Rs 6,250 (12.5% of 50,000)
ITC available on purchasing steel	Rs 1,500 (5% of 30,000)
Net tax liability	Rs 4,750 (6,250 – 1,500)

Tax liability under GST

Tax on the table (final product)	Rs 14,000 (28% of 50,000)
ITC available on purchasing steel	Rs 5,400 (18% of 30,000)
Net tax liability	Rs 8,600 (14,000 – 5,400)

Impact of GST on the Furniture Industry

It is clear from the above table and examples, that the tax rate under GST on wood, furniture, iron or steel is higher than the current applicable VAT rates.

Hence, there will be an increase in the tax liability of iron or steel manufacturer under GST. GST is more beneficial for the wooden furniture manufacturers than the iron or steel furniture manufacturers.

Keyman Insurance Policy- Income Tax

Keyman insurance can be defined as an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the employee and the benefit, in case of a claim, goes to the employer. The `keyman’ here would be any person employed by a company having a special skill set or substantial responsibilities and who contributes significantly to the profits of that organization.

Who can be a Keyman?

Anybody with specialized skills, whose loss can cause a financial strain to the company are eligible for Keyman Insurance. For example, they could be:

-Directors of a Company

      -Key Sales People

-Key Project Managers

      -People with Specific Skills

Advantages of keyman insurance to the company :

1. In case of death of a keyman the company gets money to cope up with the loss
2. any company buying keyman insurance for its employee can claim a deduction for the premium paid for the policy as a business expense under Section 37(1) of the Income Tax Act.
3. No advance intimation/approval is necessary from the Income Tax authorities to claim deduction of insurance premium payment.
4. This policy can be used as either an extra superannuation benefit or an ex-gratia payment to the key employee during the service period. If the company receives the proceeds on maturity, then they are taxable.
5. The company can also raise loans on the policy from LIC at 12 per cent per annum.
6. The fact that the employee/director’s life is insured for a large sum that will be paid by LIC to his family if he dies, it is bound to ensure loyalty and avoids employee turnover.
7. For the executives earning high salaries, this policy can be given as a hike in salary and save on the tax outgo.
8. At the same time, it also helps the company in its tax planning.
9. The directors can also safeguard their immediate family from getting affected by the vagaries of the industry and the various business cycles that a company has to face.
10. Insulate the risk of financial loss against loss of a Keyman.
11. Interest on loans taken against a keyman insurance policy may also be allowed as business expenses.
12. Premiums paid by the company on the life of a keyman would not be treated as perquisites in the hands of such a keyman when the company’s request is accepted by the assessing authority.
13. Keyman Insurance policy is a positive measure to improve the retention of the keyman in thecompany.

Disadvantages of Keyman insurance :

1. The amount on claim or maturity under a keyman insurance policy is not exempt under Section 10 (10D) of the Income Tax Act if the company is paying the premiums. However, in case the policy has been assigned to the keyman and the keyman is paying the premiums, then the claim/maturity proceeds are exempt under Section 10 (10D).
2. If the policy, after attaining surrender value, is endorsed to the employee, then the surrender value/maturity value is chargeable to tax under Section 17 of the Income Tax Act. This is because it is treated as `profit in lieu of salary’ in the hands of the employee.

The policy is beneficial from the keyman’s point of view. This is in case the company decides to endorse the policy to the keyman. This can be done only after a surrender value has been attained, which usually takes 2-3 years (depending on the insurer). In doing so, the key man benefits, by having an insurance policy in his name the initial premiums of which, have already been paid by his company. And although he might have to pay tax on surrender value, if endorsed in the early years when the surrender value is low, the tax liability of the keyman is reduced to a great extent after accounting for the premiums paid by his company.

Treatment of Payments – for the Company

·         All claims – maturity, surrender or death benefit received by the company are taxable.

·         In case of the keyman retiring, the company may surrender the policy for its cash value, or assign the policy absolutely in favour of the keyman.

·         In case of an assignment, the surrender value of the policy at the time of assignment may be treated as perquisite in the hands of the employee, and taxed accordingly by the assessing authority.

Insurance Worth of a Keyman :

The insurance worth of a keyman is the lower of:

·         5 times the average net profit of the company for the past 3 years

·         2 times the average gross profit of the company for the past 3 years

·         10 times of the keyman’s annual compensation package.

Section 194I- TDS on Rent

What is Section 194I?

• The person (not being an Individual or HUF) who is responsible for paying of rent is liable to deduct tax at source.
• in case the aggregate of the amount of rent credited or paid or likely to be credited or paid during the financial year exceeds Rs. 1,80,000/-
• Also, individuals and/or HUFs who are subject to tax audit are also under an obligation to deduct the tax at source.
• The limit of Rs. 1,20,000/- was enhanced to Rs. 1,80,000/- w.e.f. 1.7.2010

What is the Reason for Introduction of TDS u/s 194I?

• The Finance Act, 1994 inserted the Section 194I, regarding deduction of tax from rent
• The Government felt that an item of income which should be covered under TDS Deduction should be the income by way of rent
• In other countries as well, such income is subject to deduction of income tax at source

What is the Meaning of ‘Rent’ in reference to Section 194I ?

• ‘Rent’ means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any:
1. land or
2. Building (including factory building) or
3. Land appurtenant to a building (including factory building) or
4. Machinery or
5. Plant or
6. Equipment or
7. Furniture or
8. Fittings
• whether or not any or all of the above are owned by the payee-Explanation (i) to Sec. 194-I. Sub-letting is also covered.
• If the landlord collects security or advance payment at the time of letting out a building to a tenant on the condition that the deposit will be refunded at the time of vacating the building, then such a receipt is not in the nature of income and, therefore, no tax is to be deducted at source u/s 194I.
• However, advance rent (not in the nature of refundable security deposit) paid is, subject to tax deduction. Moreover, where any such rent is credited to ‘suspense account’ or to any other account shall also be liable to deduct tax at source.

What Payment is Covered u/s 194I?

• Income from letting out of factory building
• Where a factory building is let out, the rent received generally is income from business in the hands of the lessor or the owner of the factory. Only in a few cases it is income from property in the lessor’s hands.
• But such payment also, which is business income in the hands of the lessor and for which he will necessarily be paying advance tax and finally be returning the rental income, will be subject to tax deduction at source or TDS.
• This is an unnecessary burden on both taxpayer and the tax administrator, because collection of tax will take place as TDS from the lessor without much delay.
• Rent includes service charges
• Service charges payable to business centres are covered under the definition of rent, as they cover payments by whatever named called.
• TDS requirement where building and furniture, etc., let out by separate persons
• In case where building is let out by one person, and furniture, fixtures, etc., are let out by another person, then the payee is required to deduct tax under Sec. 194I only from the rent paid/credited for the hire of building.
• TDS requirement where rent not payable on monthly basis
• Sec. 194-I does not mandate that the tax deduction should be made on month-to-month basis.
• Therefore, if the crediting of the rent is done on quarterly basis then deduction at source will have to be made on the quarterly basis only. Where the rent is paid on yearly basis deduction also will have to be made once a year on the basis of actual payment or crediting.
• Charges regarding cold storage facility
• In the case of cold storage where milk, ice cream, vegetables, etc., are stored, the payment may be styled as charges for use of plant and not for use of building. Cold storage is a plant.
• Hall rent paid by an association for use of it
• Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of hall exceeds Rs. 1,80,000
• Payments to hotels for holding seminars including lunch
• Where hotels do not charge for use of premises but charge for catering/meal only, then provisions of Sec. 194I would not apply. However, Sec.194C would apply for catering part.

Who is Liable to Deduct TDS u/s 194I ?

• The person (not being an Individual or HUF) who is responsible for paying any income to resident by way of rent is liable to deduct tax at source.
• As per Budget 2017,individual /HUF (not covered under Tax Audit) paying rent to a resident exceeding Rs 50,000 per month are also liable to deduct TDS @ 5%.This amendment will be effective from 01.06.2017.
• In case the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to payee exceeds Rs. 1,80,000/-

What is the Point of Deduction of TDS?

• Tax is required to be deducted at source at the time of credit of ‘income by way of rent’ to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

What is the Rate of TDS?

S. No	Nature of Payment	Rates of tax deduction
1	Rent of plant and machinery	2%
2	Rent of land or building or furniture or fitting	10% (5% if rent exceeding Rs 50,000 / month is paid by individual/HUF who are not liable for tax audit)

No deduction or Deduction at Lower Rate under Sec. 197

• On application by payee in Form no. 13, if the Assessing Officer is satisfied that this total income justifies no deduction of tax or deduction at lower rate, he may issue a certificate in Form No. 15AA to that effect directly to the payer.

Under what circumstances TDS u/s 194I is not deductible?

• Amount payable/paid not exceeding Rs. 1,80,000 during the financial year No tax from the amount payable in respect of rent is deductible where the amount of such rent credited or paid or likely to be credited or paid during the financial year to the payee landlord or lessee does not exceed Rs. 1,80,000.
• Where tenant is individual or Hindu Undivided Family Deduction is not required under Sec. 194I if the amount is paid or payable by an individual or Hindu Undivided Family. If :
1. the individual/HUF is not to carrying on any business/profession or
2. individual/HUF not liable to tax audit in preceding year
• Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre
  Representations have been received from various quarters regarding applicability of the provisions of Sec. 194-I of the Income Tax Act to the sharing of the proceeds of film exhibition between film distributor and film exhibitor owning a cinema theatre.The matter has been examined by the Board and the Board is of the view that the provisions of Sec.194-I would not be attracted to such payment because: the exhibitor does not let out the cinema hall to the distributor. Generally, the share of the exhibitor is on account of composite services; and The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature.
• Where the payee is the Government at agency
  Under the provisions of Sec. 196, no tax is required to be deducted at source from any sums payable to the government. The matter with regard to the statutory authorities and the local authorities referred to above, has been examined by the Board. Sec. 190. And it provides for deduction of income tax at source as one of the modes of collection of income tax with respect of an income. And this is notwithstanding that the regular assessment in respect of such an income is to be made in a later assessment year. The income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, is exempt from income tax under Sec. 10(20A).Similarly, the income of a local authority which is chargeable under the head ‘Income from house property’ or ‘Income from other sources’, is exempt from Income-tax under Sec.10(20).There is no other condition specified in these two clauses of Sec.10 which is necessarily to be satisfied to avail of the income-tax exemption. There is no requirement to deduct income-tax at source on income by way of ‘rent’ if the payee is the governmental agency. In the case of the local authorities and the statutory authorities, there will be no requirement to deduct income-tax at source from income by way of rent if the person responsible for paying it is satisfied about his tax-exempt status under clause (20) or (20A) of Sec.10 on the basis of certificate to this effect given by the said authorities.

What is the time limit on depositing TDS?

• Where the payment is made by or on behalf of the Government- On the same day (without using any challan form)
• Where the payment is made in any other case than the Government- On or before 7 days from end of month in which deduction is made, where tax is paid accompanied by an Income tax challan
1. If the amount is credited or paid in the month of March- On or before April 30th
2. In any other case- On or before 7 days from the end of the month in which the deduction is made.