ET Intelligence Group Knowledge Forum Bangalore 9 th March 2005 S. Ganesh Arvind Brands Limited VAT* - Implications on Supply Chain Management *VAT denotes State-Level Value Added Tax

ET Intelligence Group Knowledge Forum

Bangalore 9 th March 2005

S. Ganesh

Arvind Brands Limited

The ABC of VAT The Apparel Value Chain Impact in the Value Chain If you are a Textile Manufacturer If you are a Fabric Trader/Importer If you are a Apparel Manufacturer If you are a Retailer If you are a Logistics Provider Conclusion Presentation Flow

The ABC of VAT

The Apparel Value Chain

Impact in the Value Chain

If you are a Textile Manufacturer

If you are a Fabric Trader/Importer

If you are a Apparel Manufacturer

If you are a Retailer

If you are a Logistics Provider

Conclusion

The ABC of VAT A Raw Material Producer Sale Value Rs. 100 VAT @4%-Rs.4 Net VAT Payable – Rs.4 B Manufacturer Sale Value Rs. 200 VAT @4%-Rs.8 Net VAT Payable – Rs.4 C Wholesaler Sale Value Rs. 250 VAT @4%-Rs.10 Net VAT Payable – Rs.2 D Retailer Sale Value Rs. 300 VAT @4%-Rs.12 Net VAT Payable – Rs.2 Total tax paid in the chain = Rs.12 equivalent to the Last point tax

The ABC of VAT contd.. VAT is a multi point tax payable on value addition at every stage Cascading of tax is avoided through credit mechanism Full credit for input tax paid within state on Goods sold locally or interstate/Export (refundable) About 270 items including drugs and medicines, all agricultural and industrial inputs, Capital good would attract 4% VAT. Other items would attract 12.5% VAT. Except Gold & bullion -@1%. Petrol and diesel would be kept out of VAT Sugar, Textile and Tobacco covered under AED will not be under VAT for one year Not Taxable under VAT if annual turnover upto Rs. 5 lacs (or less to be decided by the states). Optional Scheme for turnover upto Rs. 50 Lacs Source : White paper on State-Level Value Added Tax dated 17 th Jan 2005

VAT is a multi point tax payable on value addition at every stage

Cascading of tax is avoided through credit mechanism

Full credit for input tax paid within state on Goods sold locally or interstate/Export (refundable)

About 270 items including drugs and medicines, all agricultural and industrial inputs, Capital good would attract 4% VAT.

Other items would attract 12.5% VAT. Except Gold & bullion -@1%.

Petrol and diesel would be kept out of VAT

Sugar, Textile and Tobacco covered under AED will not be under VAT for one year

Not Taxable under VAT if annual turnover upto Rs. 5 lacs (or less to be decided by the states). Optional Scheme for turnover upto Rs. 50 Lacs

The Textile-Apparel-Retail Value Chain Consumer Fiber Yarn Fabric Trims Garment Retailer

VAT Impact – If you are a Textile Manufacturer Fibre to Fabric Fabric falls under AED and hence out of VAT for One year The fabric manufacturer hence does not have an exit option for taking credits of Raw Material like fibre, yarn, dyes and chemicals With VAT of all the industrial inputs being 4%, the impact on the textile manufacturer is neutral Once Fabric comes under VAT the textile manufacturer has an exit option of taking credit of the tax paid on the inputs. The impact then would be favorable

Fibre to Fabric

Fabric falls under AED and hence out of VAT for One year

The fabric manufacturer hence does not have an exit option for taking credits of Raw Material like fibre, yarn, dyes and chemicals

With VAT of all the industrial inputs being 4%, the impact on the textile manufacturer is neutral

Once Fabric comes under VAT the textile manufacturer has an exit option of taking credit of the tax paid on the inputs. The impact then would be favorable

VAT Impact – If you are a Fabric Trader/ Importer Fabric Trader No Impact for One year as Fabric is out of VAT Once fabrics come under VAT, the impact would be the additional tax on margins Fabric Importers No Impact for One year as Fabric is out of VAT Once fabric comes under the VAT net, the billing points that are now in tax free zones will move into locations convenient to their customers

Fabric Trader

No Impact for One year as Fabric is out of VAT

Once fabrics come under VAT, the impact would be the additional tax on margins

Fabric Importers

No Impact for One year as Fabric is out of VAT

Once fabric comes under the VAT net, the billing points that are now in tax free zones will move into locations convenient to their customers

VAT Impact – If you are a Apparel Manufacturer Fabric to Garment As fabric is not under VAT for atleast one year and garment will be under 4% VAT the VAT credit can be taken for all non fabric inputs like sewing threads, zips etc Impact is marginal Realization of this impact also depends upon the pattern of intra-state purchase/sale and inter-state sale Institutional sales would become attractive Logistics Network at 4% CST The logistics cost to be weighed against the CST impact and then decide to have a C&F operation or do a CST billing Make Vendors supply Raw Material Intra-state to capitalize on VAT credit once fabrics also come under VAT Logistics Network at 0% CST Go direct to Market unless local stocking is a business need

Fabric to Garment

As fabric is not under VAT for atleast one year and garment will be under 4% VAT the VAT credit can be taken for all non fabric inputs like sewing threads, zips etc

Impact is marginal

Realization of this impact also depends upon the pattern of intra-state purchase/sale and inter-state sale

Institutional sales would become attractive

Logistics Network at 4% CST

The logistics cost to be weighed against the CST impact and then decide to have a C&F operation or do a CST billing

Make Vendors supply Raw Material Intra-state to capitalize on VAT credit once fabrics also come under VAT

Logistics Network at 0% CST

Go direct to Market unless local stocking is a business need

VAT Impact – If you are a Apparel Manufacturer An apparel manufacturer exporter gets benefit to the extent of VAT credit on inputs An Apparel Manufacturer has the following options Raw Material purchase -Conversion through job workers Raw Material purchase –Own manufacturing Product purchase Currently product purchases are taxed at 4% which is not VATable Under VAT, the Apparel Manufacturers can be indifferent in choosing the above options from the Tax perspective

An apparel manufacturer exporter gets benefit to the extent of VAT credit on inputs

An Apparel Manufacturer has the following options

Raw Material purchase -Conversion through job workers

Raw Material purchase –Own manufacturing

Product purchase

Currently product purchases are taxed at 4% which is not VATable

Under VAT, the Apparel Manufacturers can be indifferent in choosing the above options from the Tax perspective

VAT Impact – If you are a Retailer Would look for local supplies from apparel manufacturers to avail VAT credit till CST becomes NIL The additional tax on the margin should get compensated through removal of other taxes like the turnover tax* Not Taxable under VAT if annual turnover upto Rs. 5 lacs (or less to be decided by the states). Optional Scheme for turnover upto Rs. 50 Lacs *Source : White paper on State-Level Value Added Tax dated 17 th Jan 2005

Would look for local supplies from apparel manufacturers to avail VAT credit till CST becomes NIL

The additional tax on the margin should get compensated through removal of other taxes like the turnover tax*

Not Taxable under VAT if annual turnover upto Rs. 5 lacs (or less to be decided by the states). Optional Scheme for turnover upto Rs. 50 Lacs

VAT Impact – If you are a Logistics Provider Move from decentralized, fragmented child warehouses to consolidated large warehousing by manufacturers The logistics providers must improve their capabilities to handle such large warehouses There is a high possibility of large warehouses becoming strategically important for the manufacturer Hence it is necessary for the Logistics provider to prove his capability for the manufacturer to outsource this operation If you are a transporter we feel the truck loads would come down and there would be increase in fragmented small volume multi destination dispatches Opportunity for express Cargo provider and an opportunity for truckers to move in this category

Move from decentralized, fragmented child warehouses to consolidated large warehousing by manufacturers

The logistics providers must improve their capabilities to handle such large warehouses

There is a high possibility of large warehouses becoming strategically important for the manufacturer

Hence it is necessary for the Logistics provider to prove his capability for the manufacturer to outsource this operation

If you are a transporter we feel the truck loads would come down and there would be increase in fragmented small volume multi destination dispatches

Opportunity for express Cargo provider and an opportunity for truckers to move in this category

Conclusion VAT will be seamless for a common Indian Market with reforms in CST Till then the Apparel Supply Chain Network would be forced to look at Intra-state procurement/intra-state & interstate sales to maximize VAT credit C&F locations will progressively come down with reforms in CST, CFA’s will then exist for business needs The Regional intra-state players stand to gain the most in the VAT regime considering the closure of the VAT Chain as long as CST prevails Apparel Manufacturers need to either build capability of handling large wh of high volume of transactions or outsource the same to 3PL’s with necessary capabilities Consolidation would call for efficiency which to a large extent would be driven by technology We recommend the organizations to have a cross functional team to study the implications for the business All views expressed here are our interpretations of the published material available on the subject

VAT will be seamless for a common Indian Market with reforms in CST

Till then the Apparel Supply Chain Network would be forced to look at Intra-state procurement/intra-state & interstate sales to maximize VAT credit

C&F locations will progressively come down with reforms in CST, CFA’s will then exist for business needs

The Regional intra-state players stand to gain the most in the VAT regime considering the closure of the VAT Chain as long as CST prevails

Apparel Manufacturers need to either build capability of handling large wh of high volume of transactions or outsource the same to 3PL’s with necessary capabilities

Consolidation would call for efficiency which to a large extent would be driven by technology

We recommend the organizations to have a cross functional team to study the implications for the business

Thank you The white paper on the State level VAT can be accessed at http://pib.nic.in/archieve/others/2005/r2005011704.pdf