IMPACT OF VAT ON MANUFACTURING STRATEGY OF AN IDUSTRIAL UNIT By MUKUL GUPTA TAX ADVOCATE

*A multi point sales tax with set-off for tax paid on purchases. *VAT operates as a set-off scheme whereby input taxes are set-off against output taxes. *VAT automatically ensures tax on value addition.  VAT collected in all stages of manufacturing, distribution, retail and services chain. What is Value Added Tax (VAT)?

*India will adopt a dual VAT system, i.e. Central VAT and State VAT. Accordingly, manufactured goods would continue to be subjected to both Excise Duty and State VAT. *All sales tax exemptions will be withdrawn and converted to deferments, with suitable adjustments. *Some States have finalised their VAT legislations & the remaining States have, in principle, agreed to finalise their legislation shortly. U.P. may be an Exception (News clipping) VAT Overview

*No proposal for a abolition of CST Act - Only CST rate is proposed to be gradually brought down to 0%. *Likely VAT rates are 0%, 1%, 4%, Revenue Neutral Rate (RNR) & 20%. *Likely RNR shall be 12.5%. *RNR likely to be applicable on consumer goods. *Likely input tax relief available for inventory as on 31/03/2003 subject to documentary requirement. VAT - Probable Model

VAT credit to be restricted only to intra State purchases of:- - Inputs - Capital goods used in manufacturing Input tax relief available in following cases:- - Intra State sales –Inter State sales of finished goods. –Exports VAT Probable Model Contd.

Input tax relief not available in the following cases:- –Purchases made inter State/in-transit (charged to CST) –Usage of inputs in the manufacture of goods for stock / branch transfer –Usage of inputs in the manufacture of exempted goods –Purchase of inputs from non VAT registered dealers VAT Probable Model Contd.

A: producer of raw material; B: Manufacturer; C: Wholesaler; D: Retailer Tax Rate = 5% ABCD Buyer Total Tax paid by the consumer is Rs. 15 VAT: How it will work?

KVAT will have significant implications on all aspects of a assesse’s supply chain:- - Procurement/Sourcing - Manufacture - Distribution KThe following indirect taxes are applicable to a typical supply chain:- * Central excise * Import duties * Sales tax * Service tax * Octroi/entry tax VAT - Impact On Supply Chain

VAT - Diagnostic study of Indirect Taxes Procurement PROCUREMENT Imports vs. indigenous purchases. Procurement on conversion basis. Location of converter. Procurement from erstwhile tax exempt units. MANUFACTURING Stock transfers Vs. direct sales. Make/buy decisions for intermediate goods. Contract manufacturing. Conversion Warehousing/stocking points. Wholesale and retail sales. Institutional sales. Stock sales.Ware stocking points. Wholesale and retail sales.. Stock transfer Vs direct sales Warehousing/stocking point Wholesale and retail sales Institutional sales DISTRIBUTION

PROCUREMENT - INDIGENOUS SUPPLIES * PROCUREMENT FROM SALES TAX EXEMPT UNITS. * MINIMIZATION OF SALES TAX THROUGH PROCUREMENT OF SUPPLIES ON CONVERSION BASIS. Diagnostic Study Contd

PROCESSING * EVALUATING JOB WORK/ CONTRACT MANUFACTURE OPTIONS TO MINIMIZE VAT. * EXECUTING A CLASSIFICATION CHECK. * EVALUATING OPTIONS OF MAKE OR BUY IN RESPECT OF INTERMEDIATE GOODS/FINISHED PRODUCTS. Diagnostic Study Contd

DISTRIBUTION * IDENTIFYING AND EVALUATING THE OPTIONS OF : *STOCK TRANSFER *CENTRAL STOCKING POINTS * LOCATION OF WAREHOUSES/DEPOTS IN ORDER TO MINIMISE ENTRY TAX/OCTROI Diagnostic Study Contd

* ASSESSING AND EVALUATING THE VARIOUS OPTIONS ARISING FROM THE DIAGNOSTIC REVIEW AND PROVIDING A SUITE OF SOLUTIONS FOR IMPLEMENTATION. RECOMMENDING THE PROCUREMENT APPROACH THAT WOULD RESULT IN THE LEAST INCIDENCE OF: CUSTOMS DUTIES EXCISE DUTIES SALES TAXES SERVICE TAX Conclusion

UINDIGENOUS VS. IMPORT PURCHASE OPTIONS FOR CRITICAL BASKET OF PARTS AND COMPONENTS. UMAKE VS. BUY OPTIONS FOR COMPONENTS, SUB ASSEMBLIES AND FINISHED PRODUCTS. UJOB WORK / THIRD PARTY CONTRACT MANUFACTURING OPTIONS FOR REDUCING THE TAX INCIDENCE. UOPTIONS HAVING LOCATION SPECIFIC TAX IMPLICATIONS. CASE LAWS

UTHE BEST DISTRIBUTION MODEL FROM THE SALES TAX ANGLE. UTAX EFFICIENT PLANS IN THE AREAS OF: * EX-FACTORY SALES * STOCK TRANSFERS *OUTBOUND TRANSPORTATION AND WAREHOUSING CASE LAWS