Tax Benefits for Handicraft Business in India

Narendra Kumar

01 Jul, 2019

To understand the tax benefit for homemade or handicraft business firstly we have to understand what would come under the meaning of homemade craft. Homemade craft is also known as artisan, which means a type of work where useful and decorative devices are made completely by hand or using simple tools. This type of work is generally accomplished in the home or small area of craftsmen.  Also, this type of work generally requires certain type of skill or expertise in that field.

However many Courts have explained the meaning of handicraft business such as in Mysore Agarbathi Works Vs Union of India (1977) as “Handicrafts’ shall mean any manual labor exercised by way of trade or for purposes of gain in or incidental to the making of any article or part of an article, or in or incidental to the altering, repairing, ornamenting, finishing, or otherwise adapting for sale, any article.

Why Tax Benefit for Handicraft Business Specifically?

Generally, handicraft business is done on small scale with few labor mostly family members and they have specialized skill in the art which they acquired from their ancestors. They in a way represent the rich culture and heritage of our nation to the world and also generate employment in the society and help the economy to grow. Therefore, government tries to promote it nationally as well as internationally.

What all Tax Benefit is given to Handicraft?

 As, we all know that we have Parliamentary form of democracy both at Center and State level. Therefore, tax benefit is provided both by Center Government and State Government to the homemade craft business.

To understand it better let us divide it into two parts:       

• Pre GST Regime

Under the old system before GST act, handicraft was not taxable in 15 out of 29 states. However, some tax used to be levied @ 5 % in remaining states.  Also, service tax were also charged when some services is received by craftsmen for production of goods.

Also, most of homemade craft were kept under Schedule I which is exemption list under the model VAT law.

• Post GST Regime

To understand tax benefit post GST we are dividing this into two parts:

Export of Homemade Goods

Any export of homemade goods shall be ‘zero rated supply’  which means that no tax need to be paid at the time of exports but credit of the input tax related to that supply will be admissible. This regulation is been made since homemade items should be freely exported in accordance of world trade organization.

Refund shall be granted of tax on goods and exported out of India or on inputs used in the handicraft goods which are exported out of India. So, the exporter of homemade goods can get dual benefit i.e. no tax at the time of export along with refund of tax paid on inputs.

Under the IGST law, exporter of handicraft has two options to either pay IGST at the time of export or export the goods without payment of taxes (zero-rated supplies). In the first scenario, the refund of the taxes paid will be available to the exporters and in the second scenario, the refund of the tax paid on the inputs or used in the production of handicraft goods exported out of India.

The Government of India has introduced Exports from India Scheme through the Foreign Trade Policy 2015- 2020. Over 35 handicraft products such as candles, paper and clay articles would be entitled for export benefits under the scheme. Under this scheme, the government provides duty credit scrip to exporters. The rate varies from product to product and the export destination, as envisaged in the foreign trade policy. Some Merchandise Exports from India Scheme entries under handicraft sector are included for enhanced benefits under MEIS for the export.

Home Consumption of Homemade Goods

Under the new system, the legislature sorted most of the handicrafts items under the slab of 2.5 % to 6 % of GST rate. Also, the benefit is also enjoyed by craftsmen due to reduction in double jeopardy i.e. double taxation of goods both at center and state level in GST system. For example – Handcrafted candles are taxed @ 6 % under code 3406, Bangles, beads and small ware is taxed @ 2.5% etc.

• Under the GST few homemade craft items were made fully exempt. The GST council can taxed such few item when they deem fit. Therefore, handicraft industry is not required to pay any tax on such few items and also not required to comply with the rules and regulation of any other Act and statue.

• The craftsmen can also reduce its tax liability by claiming input tax credit they buy for producing the homemade goods. Higher the tax paid in input goods more they can claim input tax credit. Input tax credit is the GST paid on input good for production of Homemade craft.

• Few categories of inter- state suppliers of handicraft goods are exempted for compulsory registration of industry.
  • 1st Category: Exemption available to such persons making inter-State taxable supplies of handicraft goods.
  • 2nd Category: Exemption available to such persons making inter-State taxable supplies of the products when made by the craftsmen predominantly by hand even though some machinery may also be used in the process.

•  Section 54(3) of the CGST Act, 2017 provides for refund of any unutilised input tax credit of inputs at the end of any tax period except where
  • the goods exported out of India are subjected to export duty; or
  •  the exporter claims drawback of CGST or refund of IGST paid on such export.

• Some procedural benefit is also provided to handicraft industries under GST act as well as under some state law also.

To Sum UP

No tax is required to be paid when handicraft goods are removed for some job process in GST act . Since, under GST act tax is paid on supply therefore when goods are supplied by job worker to seller then only GST is required to be paid by that job worker and not by the homemade craftsmen.