1. Indirect Taxation
&
Supply Chain
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2. Overview
• Taxation Authority in India
• A Typical Tax Case in Manufacturing Scenario
• Taxes on Goods - Summary
• Tax Impact on SCM and Strategic Trade-off
• Case Study – Tax Planning
• GST
– Introduction
– GST Implication for Supply Chain
– GST – Proposed Tax Model
– Price Impact of GST
– Present Tax vs. GST
• Appendix
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3. Taxation Authority in India
Taxes in India are administered and imposed at three level
1 Union Government – CENVAT, CVD, SAD, Service Tax
2 State Government – VAT (Sales Tax), CST, Entertainment Tax, Works
Contract Tax
3 Local Administration – Octroi, Entry Tax
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4. A Typical Tax Scenario in Manufacturing Sector
• A manufacturing company sources raw material from intra-state, inter-state and
overseas suppliers
• While manufacturing the company takes professional services in the technical,
maintenance, consulting, etc. domain
• This company sells products directly (through it warehouse) as well as through its
distributors, located both within and outside state
Let’s take a look at the type of taxes applicable at each transaction point of supply
chain
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5. A Typical Tax Scenario in Manufacturing Sector
Intra-State
CENVAT* + VAT Intra-State
CENVAT + CST
Export Duty
VAT
Inter-State Overseas
CENVAT+ VAT CENVAT*
BCD+ CVD + SAD
VAT*
VAT
Imported Manufacturing
Plant Domestic
CENVAT* + CST
Inter-State
Services
ST
CENVAT* = CENVAT – ITC
VAT* = VAT –ITC
Inbound Outbound
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6. Major Taxes on Goods – Summary
CENVAT CST VAT
Erstwhile name Central Value Added Tax, Commonly
Definition Excise Duty, MODVAT Central Sales Tax known as Sales Tax
Imposed by Central Government, Central Government State Government
Collected by Central Government, Origin State Government State Government
At every Production/ Value
Tax event Factory Dispatch Cross State Sales addition stage
Refer to relevant central excise Refer to relevant state VAT Act
Rate tariff Act ( Range 0- 10 % ) 2% ( Range 0- 20 % )
Paid By Manufacturer Manufacturer/Goods Owner Seller
Filing up Time-Line With in 15-days, for SMEs 30 Before Crossing State Border Post Sales
days post dispatch
Yes, for Intra state sale & inter
Offset Yes, Against Input tax paid No state stock transfer against
Input tax paid
Exemption Agriculture products, Exports
Lot of goods, details refer to
products, Advolrem basis for
few manufactured goods
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7. Tax Impact on Supply Chain
• Presently Companies handling manufacturing and distribution, design their supply
chain to take benefit/reduce operational cost, based on the prevailing tax
structure. In fact the cost and time matrix optimization is also from the perspective
of reducing the tax liability, as one important parameter
• Area based tax incentive (SEZ), non-refundable input taxes, are huge roadblocks to
reach optimum operational efficiency
• Slew of taxes add to the burden of book keeping leading to high overhead costs
• Check-Naka at state/city border considerably increases truck transit time leading
to low Truck Turnaround Time and high transit inventories
• Service tax payable to Goods and Transporter Agency (GTA) on outbound
distribution cannot be adjusted against output service tax liability. This has
prevented companies from realizing the complete benefits of 3PL outsourcing
Some of the Strategic trade offs companies consider while designing their supply
chain network are detailed in the following section
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8. Strategic Trade-offs
SCM Strategy Cost Service Benefit
Save on CST
1. Open warehouses in every
Agility
state
Warehousing &
Handling Cost
2. Factories in Excise Free Save CENVAT
Agility
Zones (SEZ)
Distribution Cost
Input VAT Credit
3. Suppliers within state
Agility
More no of
Suppliers
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9. Strategic Trade-offs
• Companies open warehouses in every state and do stock transfers to avoid paying
CST. This adds to the burden of creating extra handling needs and reduces the
advantage of “economies of scale” in warehousing operations. Though this
strategy helps in making companies more agile due to wider inventory foot print,
across the country, yet the inventory carrying costs go up
• Companies set up factories in excise free zones to avoid paying CENVAT. At times
this strategy increase the transportation cost of goods. Increased transportation
and hence the lead time of delivery, negatively affects the agility of the supply
chain
• Since input VAT paid in one state cannot be recovered in another state,
companies are better off in choosing their suppliers within state, at times
overlooking quality of delivery. Vicinity of suppliers might increase the agility of
supply chain
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10. Input Credit – Applicability and Example
As per VAT/CENVAT rules related to Input Tax Credit ( ITC) full credit is available if
following conditions are fulfilled:
1. TAX INVOICE is printed on purchase invoice
2. VAT amount is shown separately
3. VAT TIN of supplier is mentioned
It needs to be verified that the purchase transaction is not covered in the negative list &
there is no provision related to reduction of VAT credit
Supplier Manufacturer Distributor Retailer Customer
• Price = 100 • Price = 200 • Price = 300 • Price = 400 • Final price to
• VAT paid = 4 • Gross VAT = 8 • Gross VAT = 12 • ITC = 12 customer is =
• ITC = 4 • ITC = 8 • Net VAT paid = 400 + 16 (@ 4%
• Net VAT paid = • Net VAT paid = (12 - (16-12) = 4 VAT in chain)
(8-4) = 4 8) = 4
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11. Tax Planning: Cases Study -1
Consider a Company A having two identical assembly lines in Gujarat and Maharashtra
where a sub-assembly is sourced from a Vendor B in Maharashtra. Vendor is supplying
the sub-assemblies to both lines at same ex-works price. Company A can affect its tax
liability for Gujarat line by following either of the mentioned provisions:
a) Simplest way to show this transaction is to show it as inter-state purchase from
Vendor B. In this case Company will be charged a 2 % CST on inter-state sale but
company A can not avail the Input Tax Credit on this purchase
b) Second way of doing the operation is for the Gujarat Plant to develop a local
vendor C, at Gujarat. This ensures that:
a) The 2% CST is not applicable any more to Gujarat Plant and
b) It can avail of Input Tax Credit (ITC) on VAT
c) The only study that needs to be done is to check that the cost of development of the
new Vendor is less than the 2% VAT that the company is paying and ITC it will be able to
avails of. If it is not, then it is better to carry on the operations the way it is being done
and paying 2% Tax
c) Third way of carrying out this transaction is to show it as a purchase for
Maharashtra assembly line and then do a stock transfer order to Gujarat. In this
case company can avoid CST and also avail input VAT credit paid in Maharashtra
state
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12. Tax Planning: Cases Study -1
Supplier Ex-works price (Including CENVAT Credit) = 2000 Rs
Supplier Input VAT credit= 20 Rs
Supplier Output Tax liability = 30 Rs
• Option 1:
Effective price to company A = Ex-work price + CST@2%= 2000 + 2000*.02 = 2040
• Option 3:
Effective price to company A = Ex-work Price + VAT Paid to supplier – Input VAT
credit for output liability = 2000 + 30 - 30 = 2000
In the option-2 buyers net effective price is less provided he is making VAT able goods
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13. GST
• GST – Goods and Services Tax aim is to reduce the overall tax burden and
associated administrative complexity. Industry is expecting that roll-out of GST will
make Supply Chain decisions tax neutral
• Under the proposed GST regime, all taxes will be bundled under two heads Central
GST (CGST) and State GST (SGST)
• CGST will subsume all taxes imposed by Central Government and SGST will
subsume all taxes imposed by State Government
• In proposed GST model State Government will also be able to impose tax on
services
• In the proposed framework CSGT will be covering entire value chain up to retail
level. This will help in widening the Tax Net
• In the GST model for interstate sales Integrated-GST (IGST) has been proposed
which can be offset against the output liability. This will effectively reduce the CST
rate to zero.
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14. GST Implication for Supply chain
Abolition of CST will eliminate tax barrier between States. Companies can consolidate their
warehouses to reduce overheads and improve operational efficiency
A: Existing Tax Scenario B: Abolition of CST
Handling Charges = 1
Handling Charges = 1 Tax = 0
Freight = 8
Tax = 0
Freight = 8
VAT= 6
CST = 12 CST = 0 VAT= 6
Freight = 2
Freight = 6 Freight = 6 Freight = 2
Gujarat Gujarat
MP MP
Cost on stock transfer = 17 Cost on stock transfer = 17
Cost on direct dispatch = 18 Cost on direct dispatch = 6
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15. GST – Proposed Tax Model
Intra-State
CGST + SGST Intra-State
CGST* + SGST*
CGST* Export Duty
+
Inter-State Overseas
SGST*
IGST CGST* + SGST*
BCD+ CVD + SAD
CGST* + SGST*
CGST*
+
Imported Manufacturing SGST* Domestic
Plant
IGST*
Inter-State
Services
CGST + SGST
Note - * signifies here
to exclude Input Tax
Inbound Outbound
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16. Integrated GST (IGST) Working Mechanism
Take a case where seller in State A is making a sale to a buyer in State B
• IGST = CGST + SGST
• Seller in State A will have to pay IGST to Center Government after adjusting ITC
• State government of A will have to compensate center the amount of SGST offset
claimed by supplier as ITC
• Center Government has to compensate the State B the amount of SGST charged
on goods
• Buyer in State B can offset IGST while discharging his output tax liability
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17. Price Impact of GST
Explanation Cost Head Present GST
A Material Consumed 80000 80000
B Manufacture profit 20000 20000
C CENVAT@ 14 % 14000 Nil
D VAT@ 12.5% 14250 Nil
E CGST @ 12 % Nil 12000
F SGST @ 8 % Nil 8000
Price for Distributor ex refundable tax G Sum ( A+B+C+E+F) 114000 100000
Price for Distributor Including all tax Sum( A+ B + C + D + E + F) 128250 12000
Tax paid : Producer to government 1 Sum( C+D+ E+F) 28250 20000
H Distributor margin@5 % on G 5700 5000
I VAT@ 12.5% 712 Nil
J CGST @ 12 % Nil 600
K SGST @ 8 % Nil 400
Price for retailer ex refundable tax L Sum ( G + H ) 119700 115000
Price for retailer including all tax M Sum ( D + G + H + I + J + K ) 134662 126000
Tax paid: Distributor to government 2 Sum(I + J +K ) 712 1000
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18. Present Tax vs. GST
Explanation Cost Head Present GST
N Retailer Margin @ 10 % on L 11970 11500
O VAT@ 12.5% 1645 Nil
P CGST @ 12 % Nil 1380
Q SGST @ 8 % Nil 920
Total Price to end consumer Sum ( M+N+O+P + Q) 148277 139800
Tax Paid: Retailer to government 3 Sum(O+P+Q) 1645 2300
Total Tax on end consumer Sum ( 1+2 +3 ) 30607 23300
From the above calculation it is evident that proposed GST regime might bring down the tax
burden on end consumer to a significant level (under the assumption that all players in the
chain don’t change their margin)
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19. Appendix
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20. VAT
• VAT – Value added tax is imposed and administered by State government . It is
commonly referred as sales tax
• VAT
– Tax event – Inter state sale of goods
– Tax rate – Refer to relevant state VAT act i.e VAT on Packaged tea is 4 % in Maharashtra , and
likewise for other products
– Tax payee – Seller of goods
• VAT is applicable across the value chain till retail distribution
• VAT scope is still limited to few goods and few states
• Incase of intra state sales VAT paid on inputs can be offset against the output VAT
liability
• Incase of inter state stock transfer seller can avail VAT tax credit on his inputs
• In case of inter state purchase buyer of goods will not be eligible to offset his input tax
against his output tax liability
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21. CENVAT
• Central Excise duty, MODVAT are the erstwhile names for CENVAT. Some people still
use older names
• CENVAT is impose and administered of union government
• CENVAT –
– Tax event – Production of goods ( Except agricultural products and goods meant for
exports)
– Tax rate – Refer to relevant excise tariff act
– Tax payee – Producer/Manufacture, based on self assessment, paid at least once is 15
days , for SME this limit is one month
• CENVAT uses the framework of VAT where tax credit can be taken for the input
CENVAT paid to offset output CENVAT liability
• One to One relationship is not required to offset liability rather a pool of CENVAT
can used
• Input CENVAT tax credit cannot be passed over to next financial year
• CENVAT rules are same across the India except J&K and some UT
• Since distribution is not considered as production so no CENVAT is charged below
the stages of production
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22. Service Tax, Export Duty, and CST
• Service Tax is imposed and administered by Union Government
• Service Tax
– Tax event - Delivery of service
– Tax rate
• Service Tax - 10 % on Gross Value
• Education cess - 2% on Service Tax Value
• Higher Education Cess – 1% on Service Tax Value
– Tax Payee – Person/Company delivering services
• Tax paid on input services can be offset against the output services tax
• Export duty is imposed and administered by union government
• Under the export promotion policy of government process goods are tax is very low in
comparison to raw material like ore and agricultural products
• CST – Central sales tax is administered by union government but the amount collected goes
into the kitty of state government.
• CST
– Tax event – Inter-state sale of goods
– Tax rate – 2%
– Tax payee – Manufacture
• CST is applicable only in case of cross border sales and the amount goes to the kitty of state
from where goods originate
• CST cannot be offset against output tax liability
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23. Countervailing Duty (CVD)
• CVD – Countervailing duty is charged by Union government on specified imports.
Also known as Customs Duty
• CVD-
– Tax event – Import of goods
– Tax rate – 10 %
– Tax payee – Importer of goods
• Apart from CVD in some Special Custom duty is raised which is equivalent to
CENVAT
• Special customs duty can be offset against the out CENVAT liability
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