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Tax Planning Tool to reduce cost - Indirect Taxation

Madhukar N Hiregange 
on 19 August 2013

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“Tax planning” needs to be differentiated from tax evasion wherein one suppresses recording his sales/ services or undervalues the same deliberately. Tax planning involves the arrangement of one's affairs in a way in which one can pay the least amount of tax. Surprisingly there is any article on tax planning in indirect taxation though 100’s on direct tax. In India IDT accounts for double the DT if one were to add VAT. In these difficult times when everyone is trying to offer better quality / choice of services/ goods at lower prices and providing value added services, industry and trade may do well to look at this area in greater depth. In this paper an attempt has been made to touch on some possible areas of tax planning and also incidental value adds which may arise due to this exercise.

Tax planning under IDT could be in the following segments:

1. Claiming an exemption- Small scale [available upto Rs. 150 lakhs per independent entity manufacturing unbranded/ own branded goods] or Location based exemption which are now on the way out but available in some places. Examining whether services are as per definition or excluded; in negative list; or exempted fully or partially. Today locating outside India is also an option for reducing costs which large business houses have found useful especially if they have global customers.

2. Deciding on the method of doing business – Dealer, manufacturer, service provider [centralized registration/ ISD] , through job workers, import with MRP or otherwise. Each would have to be examined on its effect on the final tax/ duty payable.   

3. Deciding on form of organization- The option of being an SEZ, 100% EOU or a domestic unit could be examined. Here the net benefits considering the export incentives, attendant paperwork, ted tape and corruption are all major factors to be considered.

4. Evaluating long term decisions considering the impact of IDT – Transaction structuring is a onetime exercise but difficult to change once resources committed. As and when new products thought of being added, the alternatives could be examined.

5. Claiming deduction from payment of tax – credits in the form of ITC [ Input Tax Credit – VAT] or cenvat credit [ Manufacturer/ service provider] Perhaps this is the area where maximum advantage could be possible. Not availing ineligible credits is also a value adder as indirectly it avoids cost of interest and penalty added to time and effort involved in resolving the dispute. Invariably the reduction in cost of goods used is a benefit of credit optimization exercise.

6. Claiming a deduction from value for payment of duty/ tax – Invariably any deduction comes with conditions to claim the same. Here again the comparison and whether the IDT can be passed on would be critical to the decision. Decision to go under the regular scheme for those who account all transactions would invariably be advisable to the composition scheme under VAT.

7. Examining the available benefits of doing certain transactions – Getting contract under International competitive bidding entails one to get some benefits in terms of import, local purchases for which one needs to prepare proper documentation and make applications in time.

8. Examining the benefits available to certain large customers – Certain sections have been given some benefits and like the Defense sector where the possible procurement of goods without payment of customs etc is possible.

9. As an exporter ensuring all alternatives of import and export examined to minimize the cost of materials and maximize benefits as available under the Foreign Trade Policy. Accumulation of credits and their resolution for Exporters could also be a challenge worth looking at.

10. Minimise the disputes and costs of litigation. Being clear on what one is doing avoids the sapping of resources as well as at times confidence of the person.

11. Minimise the possibility of revenue audits [pay in time and file returns in time] Once audit is fixed minimise the time of departmental audit cost [interest/ penalty] by being ready.

12. While interpreting laws to ones advantage have a policy of full disclosure in acknowledged disclosure to avoid charges of suppression and consequent penalty and longer period demands.

13.  Be updated to take advantage of changing laws. The recent high court decisions on reimbursement of expenses not being taxed, chit funds being out of net,  accommodation, supply of food by hotels not being taxable under service tax are examples of proactive change in billing.

14.  Many more.

While advising/ examining transaction w.r.t. IDT laws the other complementary areas of value addition could be as under:

a.  Advice on integration of IDT to main ERP- Very rarely even large business houses have SAP or other ERP linked to the VAT or Central excise or service tax. Duplication and more importantly manual/ excel errors are likely.

b. Automation serves purposes of ensuring completeness of entries and ease of getting information. However the block to back dated entries should be built in. The overstaffing or under staffing issues could also be highlighted. 

c. Management Information Systems do not normally highlight the information on IDT though the same constitutes 20-25% of cost in most organsiations. [Ratio of purchases to sales should be somewhat equal to the ratio of credits to the total payment due.] This could be a good preventive as well as corrective check on optimizing credits.

d. The internal audit to include the areas of IDT check. [90% of organizations conducting internal audit do not have IDT in scope!!]

e. In the IDT review some incidental errors in inventory levels, material usage, reconciliation, job workers stocks, obsolescence would also be incidental information for management.

The organizations which plan for IDT from the starting and when they go for expansion/ large project analysis would find that they are able to be more cost effective. Those who have built in the regular health check in their many models to ensure cost control and reduction would also benefit by the same.    

CA Madhukar N Hiregange


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