Relevance of IDT to Purchase function (Updated)
The successful material/ purchase officers know the production needs well in terms of quality, timeliness and quantity. He also understands the cost of products / services sought to be procured, where available at economical prices. Maybe nearer the source + have a few alternatives in case of urgent procurement. In this article, we look at few options/ situation in the procurement life cycle and understand the impact. The central excise duty (CED) & service tax rate is 12.5% and 14% respectively. VAT could be around 5% or 14% depending on the State and product. CST for interstate sale is 2% subject to Form ‘C’. If there is no Form C, then the rate of VAT prevailing in the selling state would apply. In case of imports, total customs duty is normally around 27%. Therefore, the average impact of IDT in procurement of any product could range from 18% to 30% of the total purchases. The indirect tax aspects/ knowledge of such a person which could add value to his entity as well as the customers could be as under:
1. Understand the role taxes play vis a vis the concern which is procuring:
a. The purchaser who is an intermediary manufacturer liable to pay the central excise duty would be able to avail the central excise duty and utilise the same for payment of duty on his final product. Therefore with such company, ALL purchases need to be quoted CED & VAT extra. The procurement department in such cases would only compare the basic price of various vendors while placing orders for purchase.
b. Such a company may also be exporting the goods. In that case option to procurement without payment of excise duty can be examined. Maybe procurement with CT-1 certificate in case of goods procured for trading, procuring inputs duty free under Notification 43/ 2001-NT can be examined.
c. Such a company maybe manufacturing exempted products [Defence, research sector, agricultural related use etc.]. They may be selling goods in retail trade. In that case, the credit of CED would not be available. Here, comparison of purchase price from various vendors should be all inclusive as credits are not available. Maybe the job work route to avoid loading the CED on the cost of product can be examined for supply to company. Alternatively getting the same sourced from a SSI manufactured where no duty would be added could be thought of. In such companies, the VAT however would be availed and set off/ refund claimed if accumulated.
d. Such a company maybe a 100% EOU where procurement under CT-3 can be made without payment of duty and also claiming duty drawback as available.
e. The company maybe importing from outside India: In this case the option of reducing costs by importing raw materials without payment of duty, claiming the export benefits under Foreign Trade Policy like drawback, rebate, refund, Focus Market Scheme, Focus Product Scheme, Incremental Export scheme, Star exporter scrips.... maybe examined. Importing from countries having preferential tariff agreement could also save 2.5- 5% of the customs duty. For capital goods, procurement under EPCG license at zero customs / excise duty could be explored if finished goods are being exported.
f. In general, buying from the source would ensure that intermediary margins are avoided + the cenvat credit is available.
g. Where one is buying from the registered dealer/ importer under central excise [Any 1st Stage/ 2nd Stage dealer/ Importer/ Depot] can get registered for the passing on of the duty of excise (12.36%) or CVD(12.36%) or CVD + SAD(17%). Further the margin of the dealer would also be transparent in these transactions. Margins maybe compared of different vendors to negotiate better.
h. While going for contracts, the bifurcation of the supply and service could also be based on the availability of credit.
i. In case of job worker (JW), the need to capture the job workers credit on capital goods/ consumables may also be an important criterion. Asking the JW to charge the service tax though not essential could be an option.
j. The issue of the clear PO to the vendors disclosing value of material supplied Free of Cost would avoid later demands.
k. The possibility of planning the logistics by sending material directly to the job worker and sending out the goods directly from the job workers premises could save some costs.
l. The policy of having all vendors registered under VAT/ CST/ central excise & service tax maybe made mandatory.
m. Policy to buy only from sources which pass on credit maybe put in place other than in exceptions.
n. Material department needs to ensure that the duty paying documents are in order and accounts to pay only if credit is eligible.
o. The reversal of credit on non receipt of job work material within 180 days and its subsequent re credit to be controlled.
p. The credit on material purchased for captively used tools, dies , patterns and machinery could also be ensured.
q. Avoiding CST procurement as the credit is not available and procuring locally only.
r. Procuring on Just in Time to save on inventory carrying costs, reduction in cash flow.
s. Payments for service providers in time to avoid reversal.
t. Avoiding the joint charge or reverse charge applicability to the extent possible as it involves additional compliances from company.
u. Ensure completeness of credits being availed and its regular reconciliation with the returns
v. Keeping the dept. updated on the changes in law especially the budget changes which may have a substantial impact.
w. There could be many other impacts...
2. Understand the role taxes play in our concern:
a. Indirect tax can be upto 20+ % of the cost as customs duty [ normally 10% of value of imported parts], CED of upto 6-7% of the cost, Input services upto 1-1.5% of cost, VAT amounting to 3-4 or 10-11% of the cost. The availment of the eligible credits could ensure that one is very competitive. The benefit of credits can be passed onto the customers by reducing the base price.
b. Exports provide methods to get the refund/ recouping of these taxes and therefore these could be excluded when bidding.
c. The sale mix as on date may be resulting in accumulation of credit [ more of exports/ supply to 100% EOU]. Whether concern able to get refund if not then focus on local sale as the non receipt of refund becomes a cost?
d. What is the material cost of the product. More the proportion, more is the credit and vice versa.
3. At times the material & procurement team, not being able to understand the indirect tax implications agrees to some conditions to quickly procure the materials but does not realise that the impact of tax may make the order a loss from the concerns perspective. The smart procurer can save the company anywhere between 10 -20% by ensuring seamless credit and adequate documentation. Option of procuring goods as high sea sales, transit sales against Form E1, E2 et., can save CST as cost. The team should also ensure that the taxes charged by the vendors are proper especially when the concern is not able to claim Cenvat credit or claim input setoff. Otherwise, the same would result in extra cost.
The purchase planning, materials, procurement executive therefore for being able to be company centric, negotiate better and quote properly would need to have some specialised knowledge of indirect taxes which would help him to discharge his function in a value additive manner. Hope this article provides a direction. Reader may share what are the other ways in which the material/ procurement department can be impacted by IDT.
Acknowledgements to CA Mahadev for updating this article.
CA Madhukar N Hiregange
Tags :service tax