Indirect taxation-supply-chain

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Indirect Taxation&

Supply Chain


Overview

• Taxation Authority in India

• A Typical Tax Case in Manufacturing Scenario

• Taxes on Goods - Summary

• Tax Impact on SCM and Strategic Trade-off

• Case Study – Tax Planning

• GST– Introduction

– GST Implication for Supply Chain

– GST – Proposed Tax Model

– Price Impact of GST

– Present Tax vs. GST

• Appendix


Taxation Authority in India

Taxes in India are administered and imposed at three level

Union Government – CENVAT, CVD, SAD, Service Tax

State Government – VAT (Sales Tax), CST, Entertainment Tax, Works

Contract Tax

Local Administration – Octroi, Entry Tax

1

2

3


A Typical Tax Scenario in Manufacturing Sector

• A manufacturing company sources raw material from intra-state, inter-state andoverseas suppliers

• While manufacturing the company takes professional services in the technical,maintenance, consulting, etc. domain

• This company sells products directly (through it warehouse) as well as through itsdistributors, located both within and outside state

Let’s take a look at the type of taxes applicable at each transaction point of supplychain


A Typical Tax Scenario in Manufacturing Sector

CENVAT + CST

CENVAT+ VAT

BCD+ CVD + SAD

ST

CENVAT* + CST

CENVAT*

CENVAT* + VAT

VA

TV

AT

Intra-State

Inter-State

Imported

Services

Inbound Outbound

VAT*

Export Duty

Domestic

Overseas

Intra-State

Inter-State

Manufacturing Plant

CENVAT* = CENVAT – ITC

VAT* = VAT –ITC


Major Taxes on Goods – Summary

CENVAT CST VAT

Definition

Imposed by

Tax event

Rate

Paid By

Exemption

Erstwhile name Central

Excise Duty, MODVAT

Central Government,

Factory Dispatch

Refer to relevant central excise

tariff Act ( Range 0- 10 % )

Manufacturer

Offset Yes, Against Input tax paid

Filing up Time-Line With in 15-days, for SMEs 30

days post dispatch

Agriculture products, Exports

products, Advolrem basis for

few manufactured goods

Collected by Central Government,

Central Sales Tax

Central Government

Origin State Government

Cross State Sales

2%

Manufacturer/Goods Owner

Before Crossing State Border

No

Value Added Tax, Commonly

known as Sales Tax

State Government

State Government

At every Production/ Value

addition stage

Seller

Post Sales

Yes, for Intra state sale & inter

state stock transfer against

Input tax paid

Lot of goods, details refer to

Refer to relevant state VAT Act

( Range 0- 20 % )


Tax Impact on Supply Chain

• Presently Companies handling manufacturing and distribution, design their supplychain to take benefit/reduce operational cost, based on the prevailing taxstructure. In fact the cost and time matrix optimization is also from the perspectiveof reducing the tax liability, as one important parameter

• Area based tax incentive (SEZ), non-refundable input taxes, are huge roadblocks toreach optimum operational efficiency

• Slew of taxes add to the burden of book keeping leading to high overhead costs

• Check-Naka at state/city border considerably increases truck transit time leadingto low Truck Turnaround Time and high transit inventories

• Service tax payable to Goods and Transporter Agency (GTA) on outbounddistribution cannot be adjusted against output service tax liability. This hasprevented companies from realizing the complete benefits of 3PL outsourcing

Some of the Strategic trade offs companies consider while designing their supply chain network are detailed in the following section


Strategic Trade-offs

SCM Strategy Cost Service Benefit

1. Open warehouses in every state

2. Factories in Excise Free Zones (SEZ)

3. Suppliers within state

Save on CST

Warehousing & Handling Cost

Save CENVAT

Distribution Cost

Agility

Agility

Input VAT Credit

More no of Suppliers

Agility


Strategic Trade-offs

• Companies open warehouses in every state and do stock transfers to avoid paying CST. This adds to the burden of creating extra handling needs and reduces the advantage of “economies of scale” in warehousing operations. Though this strategy helps in making companies more agile due to wider inventory foot print, across the country, yet the inventory carrying costs go up

• Companies set up factories in excise free zones to avoid paying CENVAT. At timesthis strategy increase the transportation cost of goods. Increased transportationand hence the lead time of delivery, negatively affects the agility of the supplychain

• Since input VAT paid in one state cannot be recovered in another state,companies are better off in choosing their suppliers within state, at timesoverlooking quality of delivery. Vicinity of suppliers might increase the agility ofsupply chain


Input Credit – Applicability and Example

As per VAT/CENVAT rules related to Input Tax Credit ( ITC) full credit is available if following conditions are fulfilled:

1. TAX INVOICE is printed on purchase invoice2. VAT amount is shown separately3. VAT TIN of supplier is mentioned

It needs to be verified that the purchase transaction is not covered in the negative list & there is no provision related to reduction of VAT credit

Supplier

• Price = 100

• VAT paid = 4

Manufacturer

• Price = 200

• Gross VAT = 8

• ITC = 4

• Net VAT paid = (8-4) = 4

Distributor

• Price = 300

• Gross VAT = 12

• ITC = 8

• Net VAT paid = (12 -8) = 4

Retailer

• Price = 400

• ITC = 12

• Net VAT paid = (16-12) = 4

Customer

• Final price to customer is = 400 + 16 (@ 4% VAT in chain)


Tax Planning: Cases Study -1

Consider a Company A having two identical assembly lines in Gujarat and Maharashtrawhere a sub-assembly is sourced from a Vendor B in Maharashtra. Vendor is supplyingthe sub-assemblies to both lines at same ex-works price. Company A can affect its taxliability for Gujarat line by following either of the mentioned provisions:

a) Simplest way to show this transaction is to show it as inter-state purchase fromVendor B. In this case Company will be charged a 2 % CST on inter-state sale butcompany A can not avail the Input Tax Credit on this purchase

b) Second way of doing the operation is for the Gujarat Plant to develop a localvendor C, at Gujarat. This ensures that:

a) The 2% CST is not applicable any more to Gujarat Plant and

b) It can avail of Input Tax Credit (ITC) on VAT

c) The only study that needs to be done is to check that the cost of development of thenew Vendor is less than the 2% VAT that the company is paying and ITC it will be able toavails of. If it is not, then it is better to carry on the operations the way it is being doneand paying 2% Tax

c) Third way of carrying out this transaction is to show it as a purchase forMaharashtra assembly line and then do a stock transfer order to Gujarat. In thiscase company can avoid CST and also avail input VAT credit paid in Maharashtrastate


Tax Planning: Cases Study -1

Supplier Ex-works price (Including CENVAT Credit) = 2000 Rs

Supplier Input VAT credit= 20 Rs

Supplier Output Tax liability = 30 Rs

• Option 1:

Effective price to company A = Ex-work price + CST@2%= 2000 + 2000*.02 = 2040

• Option 3:

Effective price to company A = Ex-work Price + VAT Paid to supplier – Input VAT credit for output liability = 2000 + 30 - 30 = 2000

In the option-2 buyers net effective price is less provided he is making VAT able goods


GST

• GST – Goods and Services Tax aim is to reduce the overall tax burden andassociated administrative complexity. Industry is expecting that roll-out of GST willmake Supply Chain decisions tax neutral

• Under the proposed GST regime, all taxes will be bundled under two heads CentralGST (CGST) and State GST (SGST)

• CGST will subsume all taxes imposed by Central Government and SGST willsubsume all taxes imposed by State Government

• In proposed GST model State Government will also be able to impose tax onservices

• In the proposed framework CSGT will be covering entire value chain up to retaillevel. This will help in widening the Tax Net

• In the GST model for interstate sales Integrated-GST (IGST) has been proposedwhich can be offset against the output liability. This will effectively reduce the CSTrate to zero.


GST Implication for Supply chain

Abolition of CST will eliminate tax barrier between States. Companies can consolidate their warehouses to reduce overheads and improve operational efficiency

Gujarat

MP

Tax = 0Freight = 8

VAT= 6Freight = 2

Cost on stock transfer = 17Cost on direct dispatch = 18

Cost on stock transfer = 17Cost on direct dispatch = 6

CST = 12Freight = 6

Tax = 0Freight = 8

VAT= 6Freight = 2

CST = 0Freight = 6

Handling Charges = 1Handling Charges = 1

Gujarat

MP

A: Existing Tax Scenario B: Abolition of CST


GST – Proposed Tax Model

CGST + SGST

IGST

BCD+ CVD + SAD

CGST + SGST

IGST*

CGST* + SGST*

CGST* + SGST*

CGST* + SGST*

Intra-State

Inter-State

Imported

Services

Inbound Outbound

Export Duty

Domestic

Overseas

Intra-State

Inter-State

CGST* + SGST*

CGST* + SGST*

Manufacturing Plant

Note - * signifies here

to exclude Input Tax


Integrated GST (IGST) Working Mechanism

Take a case where seller in State A is making a sale to a buyer in State B

• IGST = CGST + SGST

• Seller in State A will have to pay IGST to Center Government after adjusting ITC

• State government of A will have to compensate center the amount of SGST offsetclaimed by supplier as ITC

• Center Government has to compensate the State B the amount of SGST chargedon goods

• Buyer in State B can offset IGST while discharging his output tax liability


Price Impact of GST

Explanation Cost Head Present GST

A Material Consumed 80000 80000

B Manufacture profit 20000 20000

C CENVAT@ 14 % 14000 Nil

D VAT@ 12.5% 14250 Nil

E CGST @ 12 % Nil 12000

F SGST @ 8 % Nil 8000

Price for Distributor ex refundable tax G Sum ( A+B+C+E+F) 114000 100000

Price for Distributor Including all tax Sum( A+ B + C + D + E + F) 128250 12000

Tax paid : Producer to government 1 Sum( C+D+ E+F) 28250 20000

H Distributor margin@5 % on G 5700 5000

I VAT@ 12.5% 712 Nil

J CGST @ 12 % Nil 600

K SGST @ 8 % Nil 400

Price for retailer ex refundable tax L Sum ( G + H ) 119700 115000

Price for retailer including all tax M Sum ( D + G + H + I + J + K ) 134662 126000

Tax paid: Distributor to government 2 Sum(I + J +K ) 712 1000


Present Tax vs. GST

Explanation Cost Head Present GST

N Retailer Margin @ 10 % on L 11970 11500

O VAT@ 12.5% 1645 Nil

P CGST @ 12 % Nil 1380

Q SGST @ 8 % Nil 920

Total Price to end consumer Sum ( M+N+O+P + Q) 148277 139800

Tax Paid: Retailer to government 3 Sum(O+P+Q) 1645 2300

Total Tax on end consumer Sum ( 1+2 +3 ) 30607 23300

From the above calculation it is evident that proposed GST regime might bring down the tax burden on end consumer to a significant level (under the assumption that all players in the chain don’t change their margin)


Appendix


VAT

• VAT – Value added tax is imposed and administered by State government . It is commonly referred as sales tax

• VAT – Tax event – Inter state sale of goods

– Tax rate – Refer to relevant state VAT act i.e VAT on Packaged tea is 4 % in Maharashtra , and likewise for other products

– Tax payee – Seller of goods

• VAT is applicable across the value chain till retail distribution

• VAT scope is still limited to few goods and few states

• Incase of intra state sales VAT paid on inputs can be offset against the output VAT liability

• Incase of inter state stock transfer seller can avail VAT tax credit on his inputs

• In case of inter state purchase buyer of goods will not be eligible to offset his input tax against his output tax liability


CENVAT

• Central Excise duty, MODVAT are the erstwhile names for CENVAT. Some people still use older names

• CENVAT is impose and administered of union government

• CENVAT –

– Tax event – Production of goods ( Except agricultural products and goods meant for exports)

– Tax rate – Refer to relevant excise tariff act

– Tax payee – Producer/Manufacture, based on self assessment, paid at least once is 15 days , for SME this limit is one month

• CENVAT uses the framework of VAT where tax credit can be taken for the input CENVAT paid to offset output CENVAT liability

• One to One relationship is not required to offset liability rather a pool of CENVAT can used

• Input CENVAT tax credit cannot be passed over to next financial year

• CENVAT rules are same across the India except J&K and some UT

• Since distribution is not considered as production so no CENVAT is charged below the stages of production


Service Tax, Export Duty, and CST

• Service Tax is imposed and administered by Union Government • Service Tax

– Tax event - Delivery of service– Tax rate

• Service Tax - 10 % on Gross Value• Education cess - 2% on Service Tax Value• Higher Education Cess – 1% on Service Tax Value

– Tax Payee – Person/Company delivering services

• Tax paid on input services can be offset against the output services tax

• Export duty is imposed and administered by union government

• Under the export promotion policy of government process goods are tax is very low in comparison to raw material like ore and agricultural products

• CST – Central sales tax is administered by union government but the amount collected goes into the kitty of state government.

• CST

– Tax event – Inter-state sale of goods

– Tax rate – 2%

– Tax payee – Manufacture

• CST is applicable only in case of cross border sales and the amount goes to the kitty of state from where goods originate

• CST cannot be offset against output tax liability


Countervailing Duty (CVD)

• CVD – Countervailing duty is charged by Union government on specified imports. Also known as Customs Duty

• CVD-

– Tax event – Import of goods

– Tax rate – 10 %

– Tax payee – Importer of goods

• Apart from CVD in some Special Custom duty is raised which is equivalent to CENVAT

• Special customs duty can be offset against the out CENVAT liability

Date post:	19-Oct-2014
Category:	Business
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Indirect taxation-supply-chain

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