Indirect taxation-supply-chain


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Indirect taxation-supply-chain

  1. 1. Indirect Taxation & Supply Chain Private & Confidential
  2. 2. 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 Private & Confidential
  3. 3. Taxation Authority in India Taxes in India are administered and imposed at three level 1 Union Government – CENVAT, CVD, SAD, Service Tax 2 State Government – VAT (Sales Tax), CST, Entertainment Tax, Works Contract Tax 3 Local Administration – Octroi, Entry Tax Private & Confidential
  4. 4. A Typical Tax Scenario in Manufacturing Sector • A manufacturing company sources raw material from intra-state, inter-state and overseas 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 its distributors, located both within and outside state Let’s take a look at the type of taxes applicable at each transaction point of supply chain Private & Confidential
  5. 5. A Typical Tax Scenario in Manufacturing SectorIntra-State CENVAT* + VAT Intra-State CENVAT + CST Export Duty VATInter-State Overseas CENVAT+ VAT CENVAT* BCD+ CVD + SAD VAT* VATImported Manufacturing Plant Domestic CENVAT* + CST Inter-StateServices ST CENVAT* = CENVAT – ITC VAT* = VAT –ITC Inbound Outbound Private & Confidential
  6. 6. Major Taxes on Goods – Summary CENVAT CST VAT Erstwhile name Central Value Added Tax, CommonlyDefinition Excise Duty, MODVAT Central Sales Tax known as Sales TaxImposed by Central Government, Central Government State GovernmentCollected by Central Government, Origin State Government State Government At every Production/ ValueTax event Factory Dispatch Cross State Sales addition stage Refer to relevant central excise Refer to relevant state VAT ActRate tariff Act ( Range 0- 10 % ) 2% ( Range 0- 20 % )Paid By Manufacturer Manufacturer/Goods Owner SellerFiling up Time-Line With in 15-days, for SMEs 30 Before Crossing State Border Post Sales days post dispatch Yes, for Intra state sale & interOffset Yes, Against Input tax paid No state stock transfer against Input tax paidExemption Agriculture products, Exports Lot of goods, details refer to products, Advolrem basis for few manufactured goods Private & Confidential
  7. 7. Tax Impact on Supply Chain • Presently Companies handling manufacturing and distribution, design their supply chain to take benefit/reduce operational cost, based on the prevailing tax structure. In fact the cost and time matrix optimization is also from the perspective of reducing the tax liability, as one important parameter • Area based tax incentive (SEZ), non-refundable input taxes, are huge roadblocks to reach 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 leading to low Truck Turnaround Time and high transit inventories • Service tax payable to Goods and Transporter Agency (GTA) on outbound distribution cannot be adjusted against output service tax liability. This has prevented 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 Private & Confidential
  8. 8. Strategic Trade-offs SCM Strategy Cost Service Benefit Save on CST1. Open warehouses in every Agilitystate Warehousing & Handling Cost2. Factories in Excise Free Save CENVAT AgilityZones (SEZ) Distribution Cost Input VAT Credit3. Suppliers within state Agility More no of Suppliers Private & Confidential
  9. 9. 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 times this strategy increase the transportation cost of goods. Increased transportation and hence the lead time of delivery, negatively affects the agility of the supply chain • Since input VAT paid in one state cannot be recovered in another state, companies are better off in choosing their suppliers within state, at times overlooking quality of delivery. Vicinity of suppliers might increase the agility of supply chain Private & Confidential
  10. 10. Input Credit – Applicability and ExampleAs per VAT/CENVAT rules related to Input Tax Credit ( ITC) full credit is available iffollowing conditions are fulfilled: 1. TAX INVOICE is printed on purchase invoice 2. VAT amount is shown separately 3. VAT TIN of supplier is mentionedIt 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 Manufacturer Distributor Retailer Customer• Price = 100 • Price = 200 • Price = 300 • Price = 400 • Final price to• VAT paid = 4 • Gross VAT = 8 • Gross VAT = 12 • ITC = 12 customer is = • ITC = 4 • ITC = 8 • Net VAT paid = 400 + 16 (@ 4% • Net VAT paid = • Net VAT paid = (12 - (16-12) = 4 VAT in chain) (8-4) = 4 8) = 4 Private & Confidential
  11. 11. Tax Planning: Cases Study -1Consider 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 from Vendor B. In this case Company will be charged a 2 % CST on inter-state sale but company A can not avail the Input Tax Credit on this purchaseb) Second way of doing the operation is for the Gujarat Plant to develop a local vendor 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 the new Vendor is less than the 2% VAT that the company is paying and ITC it will be able to avails of. If it is not, then it is better to carry on the operations the way it is being done and paying 2% Taxc) Third way of carrying out this transaction is to show it as a purchase for Maharashtra assembly line and then do a stock transfer order to Gujarat. In this case company can avoid CST and also avail input VAT credit paid in Maharashtra state Private & Confidential
  12. 12. Tax Planning: Cases Study -1Supplier Ex-works price (Including CENVAT Credit) = 2000 RsSupplier Input VAT credit= 20 RsSupplier 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 = 2000In the option-2 buyers net effective price is less provided he is making VAT able goods Private & Confidential
  13. 13. GST• GST – Goods and Services Tax aim is to reduce the overall tax burden and associated administrative complexity. Industry is expecting that roll-out of GST will make Supply Chain decisions tax neutral• Under the proposed GST regime, all taxes will be bundled under two heads Central GST (CGST) and State GST (SGST)• CGST will subsume all taxes imposed by Central Government and SGST will subsume all taxes imposed by State Government• In proposed GST model State Government will also be able to impose tax on services• In the proposed framework CSGT will be covering entire value chain up to retail level. This will help in widening the Tax Net• In the GST model for interstate sales Integrated-GST (IGST) has been proposed which can be offset against the output liability. This will effectively reduce the CST rate to zero. Private & Confidential
  14. 14. GST Implication for Supply chainAbolition of CST will eliminate tax barrier between States. Companies can consolidate theirwarehouses to reduce overheads and improve operational efficiency A: Existing Tax Scenario B: Abolition of CST Handling Charges = 1 Handling Charges = 1 Tax = 0 Freight = 8 Tax = 0 Freight = 8 VAT= 6 CST = 12 CST = 0 VAT= 6 Freight = 2 Freight = 6 Freight = 6 Freight = 2Gujarat Gujarat MP MP Cost on stock transfer = 17 Cost on stock transfer = 17 Cost on direct dispatch = 18 Cost on direct dispatch = 6 Private & Confidential
  15. 15. GST – Proposed Tax ModelIntra-State CGST + SGST Intra-State CGST* + SGST* CGST* Export Duty +Inter-State Overseas SGST* IGST CGST* + SGST* BCD+ CVD + SAD CGST* + SGST* CGST* +Imported Manufacturing SGST* Domestic Plant IGST* Inter-StateServices CGST + SGST Note - * signifies here to exclude Input Tax Inbound Outbound Private & Confidential
  16. 16. Integrated GST (IGST) Working MechanismTake 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 offset claimed by supplier as ITC• Center Government has to compensate the State B the amount of SGST charged on goods• Buyer in State B can offset IGST while discharging his output tax liability Private & Confidential
  17. 17. 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 Private & Confidential
  18. 18. 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) Private & Confidential
  19. 19. Appendix Private & Confidential
  20. 20. 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 Private & Confidential
  21. 21. 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 Private & Confidential
  22. 22. 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 Private & Confidential
  23. 23. 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 Private & Confidential