Goods and Services Tax, commonly referred to as GST was introduced in the country on and from 1st July, 2017. With this, the concept of “One nation, One Tax” came into force. It replaced a plethora of indirect taxes levied both by the Central and State Governments like VAT, Service Tax, Excise Duty etc. GST is considered to be one the biggest tax reforms in India since independence. Among others, one of the key benefits of this measure is removal of the cascading tax effect.
GST is a comprehensive indirect tax regime covering the supply of goods and services. The goods and services are placed into five tax slabs beginning from 0%, followed by 5%, 12%, 18% and 28%. However, as of now petroleum products, alcoholic drinks, electricity and real estate are not in its ambit and are taxed separately. A GST council comprising of Finance Ministers of the Government of India and all the States govern the various tax rates, rules and regulations.
Why Tax Planning?
So far you have accessed various means and ways to maximize your tax benefit taking recourse to the various exemptions provided by the Income Tax Act. How about taking a look at the exceptions in GST that has made lowering of your tax liability a possibility for your business? The way to save tax requires meticulous analysis and planning. By exploring the various possibilities you can increase your assets while reducing your liabilities towards GST with judicious tax planning.
What is Tax Planning?
When you aim to lower your tax liability employing various provisions under the law through a systematic process, you may call it Tax Planning. It affords you a means to minimize your tax liability by taking maximum benefits provided by the law. In the process you are also achieving another major goal – minimization of litigation. Under the GST regime, one of the areas where you can minimize your tax liability is by effective procurement planning.
Why do you require effective procurement planning?
In a manufacturing organization, the cost of raw material contributes heavily towards the cost of the product. The average component of the cost of raw material works out to be to the tune of 60 to 65% of the total cost of the product. Even a marginal reduction in the cost of raw material, say a modest 1% through effective procurement planning and management could impact the product margin and ultimately the bottom line of your company to a good extent. You need to bear in mind the dictum “A RUPEE SAVED IS A RUPEE EARNED”. The key points that could affect the cost of procurement and in turn help reduce tax liability are:
- Purchase from Registered Dealer: When you maximize purchases of raw materials from a registered dealer, you are advantaged in many ways.
- You get full credit of input tax.
- Net landed cost of material will not increase.
- Compliance is very smooth and easy.
- The price comparison is easy.
- Will minimize your out go towards tax liability.
- All these advantages will be absent if purchases are made from an unregistered dealer.
- Avoid Composite Dealer: Purchases of raw materials from a dealer who has opted under the Composition Scheme will disadvantage you with the following.
- You will not receive input tax credit.
- Since the price will be inclusive of taxes, your landed cost will be higher.
- You must plan your procurement target in such a way that you achieve a zero purchase from a composite dealer.
- Inter State versus Intra State Purchases: You have to weigh the pros and cons of the advantages of procurement from Inter State sources or confine yourself to Intra State purchases. The key points to consider are:
- Inter State purchase attracts IGST while Intra State attracts SGST and CGST.
- Impact of cash out flow is advantageous in case Inter State purchase where you receive IGST input tax credit. It can be used to set off from IGST, SGST and CGST.
- In case of an Intra-State purchase, the SGST and CGST input tax credit received by you can be used to set off respective liabilities only, which necessarily translates to a lesser amount.
- In case of Inter-State sales and Intra State purchases are high the impact on cash out flow is heavy with an accumulation of input tax credit which squeezes your working capital needs.
- An effective cost and benefit analysis regarding the two in the GST provisions makes decision making easier.
- Avoid Unregistered Dealer: Purchases made from a unregistered dealer is always disadvantageous.
- You do not receive any input tax credit.
- Pricing becomes difficult.
- May result in fluctuation of prices.
- Cost of material and finally product may be impacted.
- Compliance is difficult and may lead to other issues.
- May be burdened with tax payments under Reverse Charge for purchases from an unregistered dealer.
- Major Procurement Sources: A clear analysis of the provision in GST on the business of major vendors could reveal the avenues of probable savings:
- This will help your negotiations with the vendor.
- You can make a good saving on the procurement cost.
- You could, in turn, save taxes.
- It will surely impact the bottom line of your company positively.
- Other Measures: Other small measures will help you plan your tax liability effectively, ultimately resulting in its reduction.
- If you are a manufacturing unit, you may consider setting up your sales depot in a different state or union territory.
- Revise your purchase budgets and provide for adequate working capital.
- Make advance purchases if impact of GST is likely to affect the carrying cost of your inventory. In case the situation is reversed, postpone your purchase.
- Make a note of the effect on your cash flows resulting from the tax liability on your advances.
- Maintenance of updated Vendor and Tax Masters and reconciliation is a must to ensure proper compliance.
Conclusion: With experience of the last one year since the implementation of GST in the background, the GST Council has met on several occasions and revised the placement of several goods and services, mostly in the lower slabs. This has opened up possibilities for tax planning and adjustments within the ambit of the law to decrease tax liabilities, increase assets and ensure smooth and easy compliance.