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It
is commonly believed that VAT would impact only the pricing policy. Impact of
VAT will encompass all facets of the business i.e., procurement, manufacturing,
distribution, costing and accounting. Staffs need to be educated on the
implications of VAT and the software need to be modified to be compatible with
the VAT accounting and reporting requirements.
VAT
IMPACT ANALYSIS
Though
there may be certain common factors relevant to all trade and industry, the
impact of VAT needs to be analysed specific to the business model of the
individual business. A sound knowledge of the VAT law applicable to the
individual business model is required. Planning transition to VAT will pose
significant challenges to Trade and industry.
The
impact will be marginal to small traders and manufactures operating within a
particular State, procuring all inputs and raw materials within the State and
marketing the Goods within the same State. In the case of such entities, the
only impact will be on pricing.
The
impact will be significant for large organisations with operations spread over
India.
Since
it is difficult to present a common VAT impact analysis applicable generally to
all business, the areas which require attention to plan transition is
highlighted in this article.
1.
PRE TRANSITION INVENTORY
The
pre transition inventory needs to be planned properly. Though the sales tax paid
on raw materials and traded goods under the present sales tax Act is eligible
for input tax credit, the eligibility criteria is not uniform in all the States.
The
issues that arise are
-
Will the tax paid on the entire stock be eligible for input tax credit
irrespective of the date of purchase of the goods?
-
What is the tax amount that will be eligible for input tax credit, the tax
calculated at the rate applicable under VAT or the tax actually paid under the
sales tax Act?
-
Some of the purchase invoice will not have details of the tax rate applied and
the tax amount paid as the purchase may be from a dealer in whose hands the
sales is not liable to tax as second sale. What will be the tax credit eligible
in such cases.
-
What
are the records required for substantiating the claim of input tax credit?
-
What
is the procedure for claiming input tax credit of the goods in stock as on
31/03/2003?
The
answers to the above questions in seriatim are
-
A
dealer may have in stock goods purchased several years back. But input tax
credit will be available only for stock purchased within a specified date
prior to 01/04/03 as may be specified in the respective State VAT Acts.
-
The
rate of tax applied shall be the rate of tax under the VAT Act of the tax
rate actually paid whichever is lower.
-
Some
of the States have provided that the credit will be available only when
the tax is charged in the purchase bill. Andhra Pradesh has provided that
tax credit will be available as per the formula to be prescribed even if
the tax is not specified in the purchase bill.
-
The
dealer will be required to maintain the original invoice and such other
records as may be specified in the respective State VAT Acts.
-
The
dealer will be required to file a stock statement within a short period of
7 days to 15 days after 01/04/03 to file the statement of goods on which
input tax credit is claimed. Since most dealers are not used to such
strict stock taking norms, care should be taken to file the statement to
be files within the period specified in the respective State VAT Act. The
statement may be required to be certified by a Chartered Accountant or as
may be specified. The procedure will have to be strictly adhered to.
In
view of the restriction on the eligibility of input tax credit only on goods
procured within a period specified in the respective State VAT Acts and the
strict time limit that may be specified in the respective State VAT Acts, the
pre transition inventory needs careful planning.
(More
issues that require pre transition planning is discussed in the FAQs section of
the VAT Demystified CD published by stvat.com)
2.
PRE TRANSITION CAPITAL EXPENDITURE
Input
tax credit on capital goods used in the manufacture of taxable goods
used in the manufacture of taxable goods for sale is eligible subject
to such conditions and restrictions as may be specified in the respective
State VAT Acts.
Therefore,
it may be advantageous to plan capital expenditure after implementation
of VAT depending upon business exigencies.
PRICING
Under
the present single point system of levy of tax, the manufacturer or
the importer of goods into the State is liable to sales tax. There is
no levy of sales tax on the further distribution channel. The only tax
element that need to be factored in pricing decisions was the first
point levy of tax.
VAT,
in simple terms, is a multi point levy on each of the entities in the
supply chain with the facility of set off of Input Tax i.e., the tax
paid at the stage of purchase of goods by a trader and on purchase of
raw materials by a manufacturer. The set off of input tax will be available
only on purchases effected from within the State from a VAT registered
dealer. Credit of tax paid on Inter State purchase will not be available.
Though
in the VAT scenario one has to redefine business strategy, one important
issue is pricing. Due to multi point levy under VAT, the price to the
ultimate buyer will be higher than at present with the levy of tax on
the value addition at each point of sale and resale. The possibility
of passing on the additional cost to the ultimate buyer depends on the
elasticity of supply and demand. If the price increase cannot be passed
on to the ultimate buyer the manufacturer or the trader will have to
absorb the price increase depending again upon supply/demand elasticity.
The
impact of VAT is illustrated in the table below:
|
VAT
IMPACT - TRADING |
|
Sales
Tax as at present |
If
additional cost is passed on to the consumer |
If
distributor reduces margin |
if
manufacturer reduces margin
|
|
|
Rs. |
Rs. |
Rs. |
Rs. |
| Basic
purchase price charged by manufacturer |
100.00 |
100.00 |
100.00 |
97.90 |
| Sales
Tax / VAT @ 10% |
10.00 |
10.00 |
10.00 |
9.79 |
| Gross
purchase price |
110.00 |
110.00 |
110.00 |
107.69 |
| Value
Addition by distributor including Profit in % |
30% |
30% |
27.27% |
30% |
| Value
addition in Rs. |
30.00 |
30.00 |
27.27 |
29.37 |
|
|
|
|
|
|
| Gross
sales price |
140.00 |
130.00 |
127.27 |
127.27 |
| Sales
Tax / VAT
@ 10% |
|
13.00 |
12.73 |
12.73 |
| Input
Tax Credit |
|
10.00 |
10.00 |
9.79 |
| Net
Tax Paid by distributor |
|
3.00 |
2.73 |
2.94 |
|
|
|
|
|
|
| Selling
Price |
140.00 |
143.00 |
140.00 |
140.00 |
|
|
|
|
|
|
| Impact
on ultimate buyer |
|
3.00 |
|
|
| Impact
on Manufacturer |
|
|
|
2.10 |
| Impact
on distributor |
|
|
2.73 |
0.63 |
A
simple model has been presented in the table to avoid complication and
to facilitate easy understanding. In reality, a host of other factors
besides the set off of input tax credit needs to be considered.
PROCUREMENT
Input
tax Credit of goods purchased within the State from VAT registered dealers will
only be available, as per the draft VAT Acts, published so far. The only
exception is the Pondicherry Act which grants input tax credits of CST paid on
inter State purchases at a rate not exceeding 4%.
The
issue of procuring the goods from within the State or outside the State is to be
addressed. Though commercial consideration as to the quality of the goods, the
dependability of the supplier, cost and other factors are relevant, the tax
incidence is a factor to be considered.
Procuring
goods from within the State will improve cash flows as the tax element of the
goods will be available for set off against the output tax payable.
In
respect of goods already procured form within the State, depending upon the
elasticity of supply and demand, manufacturers need to renegotiate price with
the supplier so that the benefits accruing to the supplier of goods (in the case
of manufactured goods) is equitably shared.
MANUFACTURING
VAT
will impact significantly manufacturers who have plants in different States
manufacturing sub assemblies of a single product that is assemble in a
particular State. So far the sub assemblies would have been stock transferred
for assembly at the main plant.
In
the VAT scenario, stock transfer may not be an ideal option as there are
restriction on availment of input tax credit by the unit effecting the stock
transfer of the sub assembly. Under VAT input tax credit of raw materials used
in the manufacture of goods for stock transfer will be restricted to that paid
in excess of 4%. This may not be advantageous if the inputs are sourced locally
by the unit effecting stock transfer as most of the basic industrial raw
materials may fall in the 4% slab in the VAT schedule.
A
decision will have to be taken on the advisability of the relocation of
manufacturing units so that all the sub assemblies are manufactured in one
State.
A
manufacturing unit may be purchasing a sub assembly for a Vendor. It may be
advantageous to procure the materials, supply to the vendor and get the sub
assembly manufacture as a pure job work.
In
case of organisations with multi location manufacturing facilities, a relook at
the product mix will be required to take advantage in the regime of the benefits
available to each of the units based on the pattern of procurement and
distribution.
A
few instance have be presented as an example. A systematic review of the
manufacturing practice in the unit will help focus on areas that need to
reoriented to suit the VAT regime.
DISTRIBUTION
Pricing
is an important area and has therefore been discussed separately. Besides
pricing the other aspects that need to be studied are
-
Whether
stock transfer to depots would be economical than direct inter state sale?
-
What
should be length of the supply chain?
-
How
should retail sales and sale to wholesalers be managed? i.e., through the
depots or as a direct inter State sale.
-
Should
the current warehousing or stocking points in different State be continued?
Here
again the list is illustrative. Only a study of the present distribution policy
in the light of the changes in the VAT regime will highlight areas that require
a detailed study.
COSTING,
ACCOUNTING AND MODIFICATIONS TO SOFTWARE
A
thorough evaluation of the Information technology initiatives is called for to
plan smooth transition to VAT.
The
costing/ accounting software deed to be redesigned for valuation of stock,
costing of products, accounting for inputs procured etc.,
One
area that requires immediate attention is the modifications to the software to
value stock of goods as on 31/03/2003. As already discussed the tax paid on
goods in stock as on 31/03/2003 will be eligible for set off subject to the
conditions specified by the respective State Acts. The software should generate
the stock list of goods eligible for setoff.
In
this article only few instances have been highlighted. As already discussed the
impact cannot be generalized. Manufacturing units will need expert advice on a
study of the present procurement, manufacturing, distribution, costing and
accounting policies. Number of issues and tradeoffs would need to be identified
based on an impact assessment study. The VAT impact should be analysed under
different assumptions and after consideration of all the alternatives, a
decision should be taken.
If
in house talent is not available it may be worthwhile to seek professional help
form your Management Consultant or Chartered Accountant.
OTHER
ASPECTS
Some
of the other aspects that need to be taken care of are
Last
but not the least aspect is to study the VAT draft Act of your State. The draft
VAT Act has not yet become law. Legislation is drafted by tax administrators and
bureaucrats who may not be well versed with business realities. Trade and
Industry should make strong representations to ensure that the VAT that is to be
implemented is fair and practical. In this era of e governance and transparency,
we have the opportunity of studying the draft legislation before it becomes law.
This would have been unthinkable a decade back. The opportunity should not be
lost.
02/02/2003
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