Tax Planning - Tool to Reduce Cost - Indirect Taxes

Tax Planning – Tool to
reduce cost - Indirect Taxation
CA Madhukar N Hiregange
"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 ones 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 one time 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. Hereagain 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 oen 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.