Vat

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Vat

  1. 1. Impact of VAT 2 March 2005CRISIL Limited
  2. 2. Present sales tax structure Raw material cost = Rs 1,060Raw material = Rs 1,000 Value add = Rs 1,000Sales tax @ 6% = Rs 60 Sales price = Rs 2,060 Sales tax @ 10% =206 Input supplier Manufacturer Dealer Retailer Rs 60 collected and Rs 206 paid by input paid by supplier manufacturer To government 2
  3. 3. Present sales tax structure Price to retailer = Rs 2,794Price to dealer = Rs 2,266 Value added = Rs 500Value added = Rs 500 Selling price of retailer = Rs 3,294Selling price of dealer = Rs 2,766 Resale tax @ 1 %= Rs 33Resale tax @ 1 %= Rs 28 Selling price to customer = Rs 3,327Input supplier Manufacturer Dealer Retailer Rs 28 collected and Rs 33 collected paid by dealer and paid by retailer To government 3
  4. 4. Value-added tax Raw material cost = Rs 1,060 Raw material recorded = Rs 1,000Raw material = Rs 1,000 Value add = Rs 1,000VAT @ 6% = Rs 60 Sales price = Rs 2,000 VAT @ 10% =200 Input supplier Manufacturer Dealer Retailer Rs 60 collected Rs 200 collected and Rs 200 - 60 = 140 by paid by input paid by manufacturer supplier manufacturer To government To government 4
  5. 5. Value-added tax Price to retailer = Rs 2,750Price to dealer = Rs 2,200 Recorded by retailer = Rs 2,500Recorded by dealer = Rs 2,000 Value added = Rs 500Value added = Rs 500 Selling price of retailer = Rs 3,000Selling price of dealer = Rs 2,500 VAT @ 10 %= Rs 300VAT @ 10 %= Rs 250 Selling price to customer = Rs 3,300 Input Supplier Manufacturer Dealer Retailer Rs 250 collected Rs 250 collected by by dealer retailer Rs 300 - 250 = Rs 250 - 200 = 50 50 paid by paid by To government To government retailer 5 dealer
  6. 6. Difference in tax collectionsS tages Input Manufacturer Dealer Retailer Total tax s upplier collectionUnder present sales tax 60 206 28 33 327Under VAT 60 140 50 50 300S ource: C RIS INFA C 6
  7. 7. VAT scenariosS ales / Local Inter s tate S tock trans fer E xportsInputsLocal Full input tax Full input tax Input tax credit Refund of input credit credit in excess of 4 tax paid per cent allowedInter s tate No credit No credit No credit No creditS tock No credit No credit No credit No credittrans ferNoteAll inter state sales and purchases will attract a CST of 4 per cent , notvatableS ource: White paper on VA T 7
  8. 8. Salient points VAT rates are generally lower than the present local sales tax rates  Currently high rates – Tamil Nadu, Maharashtra, Andhra Pradesh, Karnataka  Currently low rates – Gujarat, Uttar Pradesh Tax paid by manufacturers will decrease since VAT rates are lower and also because input credit is available for local purchases. Tax payments by distributors will increase  VAT –12.5 per cent for value added greater than 8 per cent  VAT – 4 per cent for value added greater than 25 per cent 8
  9. 9. Salient points Distribution channel may also be affected because of disclosure problems. Tax collection by state governments will decline in the short term. The prices of items like automobiles, cement, consumer durables may not fall; however, the prices of products like pharmaceuticals, auto ancillaries, etc may decrease. 9
  10. 10. Framework for analysing industry impact Present LST and proposed VAT rates Location of manufacturing facility Input purchase pattern Sales pattern Concessions on inputs Exemptions Sales strategy (manufacturing vs marketing) Channel margins 10
  11. 11. Framework for analysing industry impact Present LST and proposed VAT rates  The higher the difference in rates at the sales point, the greater the benefit in terms of reduced taxes (pharmaceuticals) Location of manufacturing facility  Plants located in states with higher sales tax to benefit due to the reduced rate of VAT, in case of intra-state sales (cement) Input purchase pattern  Players procuring raw materials from within the state (automobiles) to benefit due to the full input credit Sales pattern  Players going in for stock transfer (automobiles) will have to realign strategies to take into account the lost credit on the input purchases. 11
  12. 12. Framework for analysing industry impact Concessions on inputs  Input costs will increase for players (consumer durables) who currently enjoy concessional rates lower than 4 per cent, since their inputs will now be taxed under VAT at 4 per cent. Exemptions  Current sales tax exemptions will be changed to sales tax deferrals. Players operating in notified backward areas will be outside the VAT net. 12
  13. 13. Framework for analysing industry impact Sales strategy (manufacturing vs marketing)  The effect on players who outsource manufacturing tasks will be greater on account of higher taxes on value added (consumer durable, pharma, FMCG). Channel margins  The higher the channel margins and the longer the channel length, the greater the impact. 13
  14. 14. Automobiles – Rate change VAT rate = 12.5 % M = Manufacturing base M M Under VAT Neutral M Higher than VAT 14
  15. 15. Automobiles – Impact Input purchase pattern: High proportion of local purchases (average LST around 4 per cent) Sales pattern:  Mostly inter-state (around 80 per cent)  Local sales: around 20 per cent Channel margins:  Dealer – 5-6 per cent for 4-wheelers - 4 per cent for 2-wheelers Impact on manufacturer margins – Marginally positive 15
  16. 16. Consumer durables – Rate change VAT rate = 12.5 % M = Manufacturing base M M M Under VAT Lower than VAT Higher than VAT 16
  17. 17. Consumer durables – Characteristics Input purchase pattern: Mainly inter state. Imports: 30 per cent Concessional rate of around 2 per cent paid on inputs. Sales pattern: Mostly inter state Channel margins  Distributor mark-up – 5.5 per cent  Dealer mark-up – 6.5 per cent 17
  18. 18. Consumer durables – Impact Impact on manufacturer margins – Mixed bag Input costs will increase for players who currently enjoy concessional rates lower than 4 per cent, since their inputs will now be taxed under VAT at 4 per cent. Prices could decline in West Bengal and Karnataka, where the existing rate of tax is high. Companies using independent marketing companies to be negatively affected (value add at marketing end to be taxed more). 18
  19. 19. Pharmaceuticals – Rate change VAT rate = 4 % M = Manufacturing base M M M M M Under VAT Zero rate M Higher than VAT 19
  20. 20. Pharmaceuticals – Characteristics Input purchase pattern: Mainly intra-state. Imports marginal (9 per cent).  Sales pattern: Exports – 40 per cent. Inter state – 40 per cent  Channel margins:  Distributor mark-up – 10-15 per cent  Retailer margin – 20 per cent 20
  21. 21. Pharmaceutical – Impact Impact on manufacturer margins – Positive Overall benefit of 4-5 per cent.  High competition in the domestic market.  Recent impact of MRP-based excise duty on companies.  Prices are expected to fall by only 1-2 per cent. Players using independent marketing companies will be adversely affected (value add at marketing end to be taxed more). 21
  22. 22. Cement – Rate change VAT rate = 12.5 % M = Manufacturing base MM M M n.a. M Under VAT Lower than VAT M Higher than VAT 22
  23. 23. Cement – Characteristics Cement factories present in clusters Inputs like limestone sourced locally Channel margins:  Distributor – 1 per cent  Retailer – 3 per cent Sales pattern  Stock transfer – 20 per cent  Inter-state sale – 30 per cent  Intra-state sale – 50 per cent 23
  24. 24. Cement – Impact Impact on manufacturer margins – Positive Companies in southern states to enjoy greater benefit (India Cements, Madras Cements) However, benefit will not be passed on  Favourable demand-supply balance  Input costs for manufacturers have risen  Prices have increased in the last 9 months by 10-15 per cent Gujarat – Prices to increase due to increase in sales tax rate 24
  25. 25. Paints – Rate change VAT rate = 12.5 % M = Manufacturing base M M Under VAT Lower than VAT M Higher than VAT 25
  26. 26. Paints – Characteristics Input purchase pattern: Mainly interstate purchases. Sales pattern: Both inter- and intra-state sales. Exports nil. Channel margins:  Dealer – 5 per cent  Retailer – 15 per cent 26
  27. 27. Paints – Impact Impact on manufacturer margins – Positive Decorative paints segment: Prices stable Decorative paints  Recent input cost hikes.  Manufacturers margins to increase.  Retailer margins to be strained. Industrial paints  Bargaining power of OEMs better.  Benefits from VAT will be passed on to OEMs. 27
  28. 28. FMCG – Characteristics Food products Non-food productsProcurement Mainly local Mainly localInput s ales tax rates 0% 4%Under VA T 0% 4% with creditLocation Across states Across statesPres ent LS T avg 10 % avg 15 %Under VA T 4% 12.50%C hannel margins Distributor 2% 2% Retailer 10% 10%S ource: C RIS INFA C 28
  29. 29. FMCG – Impact Food products  Positive impact on manufacturer margins  Benefit of around 5 per cent Non-food products  Marginally positive impact on manufacturer margins  Benefit of about 2 per cent. Prices will remain stable  Since the unit price of products is small, implementing a change in prices could give rise to coinage issues. 29
  30. 30. Thank You Contact Details: Phone: +91 (22) 5691 3001- 09CRISIL Limited Fax: +91 (22) 5691 3000 www.crisil.com

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