Institute of Cost Accountants of India
WIRC Bulletin-May 2018

GST: Tax Planning by CMA Vinod Shete

Goods and Service Tax (GST) replaced all indirect taxes levied on goods and services by the Government, both Central and States. GST is one of the biggest Tax Reforms in India since its independence. One of the Key benefits of GST is removal of the cascading tax effect.  

What is Tax Planning?

Tax Planning is the systematic process of reducing the tax liability by using various provisions under the Law. The main purpose behind Tax Planning is not only Reduction of Tax Liability but also to the Minimization of Litigation. In other words, Tax Planning means to reduce the tax liability by taking maximum benefits of the provisions under the law.

In GST, We can minimise Tax Liability through Effective Procurement Planning.

Why is Effective Procurement Planning required?

Raw material cost is the major cost element of the total cost of a product of a manufacturing Organisation. Average raw material cost is to the tune of 60 to 65 % of the total cost. By saving 1% cost through effecting procurement planning has good impact on product margins and ultimately bottom line of the company. Following key points will help to minimise the Tax liability and cost of effective procurement:

  1. Registered Dealer: Maximizes Procurement from registered dealer will get full credit of input tax and net landed cost of material will not increase. Major advantage is – 100% input tax credit can be availed and ultimately the tax liability out go can be minimised. Compliance is very much easier and smoother as compared to purchasing from unregistered dealer. Another advantage is that price comparison is easier in case of purchases from the registered dealer.
  2. Composite Dealer: Input tax credit is not available on the purchases from Dealer who opted under Composition Scheme. Taxes are inclusive in the prices and obviously landed cost of material is higher than procurement from the registered dealer. Procurement planning should be in such a way that there should be minimal purchases or set a target of Zero purchases from composite dealer.
  • Inter-State or Intra-State Purchases : Inter-State purchases attracts IGST while Intra-State attracts SGST & CGST .From Cash outflow perspective, IGST input tax credit can be utilised to set off tax liabilities from IGST, CGST and SGST whereas CGST & SGST input credit tax can be utilised to set off for respective liabilities only. In case, inter-state sales and intra-state purchases are higher, cash out flow is heavily impacted and accumulation of input credit increases the pressure on working capital. Cost & Benefit analysis is to be required for decision making about inter-state v/s intra-state procurement in the purview of GST provisions.
  1. Unregistered Dealer: Always try to avoid purchasing from unregistered dealer mainly due to non-availability of input credit and secondly, because price benchmarking is very difficult. The chances of fluctuations in prices are more and it may lead to increase in the material cost. Compliance issues may be cropped up and tax needs to be paid under Reverse Charge for the purchases from Unregistered Dealer.
  2. Major Procurement: Analyse the impact of GST on the business of major vendors and find out probable saving avenues and negotiate the price with the vendor. It would result in good saving in procurement cost & taxes. Further, it will positively impact the bottom line of the Company.    

 

                

  Conclusion: Procurement cost can be saved through analysing & effective applications of GST provisions. Tax planning helps to minimise the tax lability and maximize Compliance. In other words, Tax planning is an integral part of effective procurement. I believe “A RUPEE SAVED IS A RUPEE EARNED”.

 

8 thoughts on “GST: Tax Planning by CMA Vinod Shete

  1. Hi Sir,

    The Article is excellent. It covers all the points of effective usage of funds as well as increase the profitability. It gives clear guidelines to procurement team for setting better strategy which leads to benefit to the organisation.

    1. Dear Mr.Apte
      Good Evening !!!!
      Thanks for your comments and your point is well noted . My suggestion : Please ensure that all service providers should be registered under GST ; enable to take benefit of full Input Tax Credit . Further , I will write separate article on Service Industry .
      With Warm Regards
      CMA Vinod Shete

  2. Hello Sir,

    Thank you very much for sharing the article. I have a few queries as which are as under:

    1. Is GST is applicable for advances made against purchases.? If yes, this will really impact the working capital requirement and cash flow of the business and hence companies will have to plan their procurement well in advance and negotiations with the vendor.
    2. Due to reduction in GST rates, companies may also face challenges to reduce their price to the final consumers due to the anti profiteering clause. The companies will have to also keep this in mind in deciding about the prices for their products. Can yo please provide us guidance on this

    1. Hello Siddharth
      Thanks for reading my article . Below is my reply to your queries
      1) Yes , GST is applicable on advances made against purchases and it’s impacted on working capital .It is very much clear that Tax Payer is not entitle to get Input Tax Credit till the time of receipt of goods or services.
      Further, I am agree with your statement .
      2) The main purpose of Anti Profiteering Clause is to pass on Rate Reduction Benefit to Customer and there should not be any profiteering due to change in tax structure or its revision and should not create an opportunity to increase profit margin at various stages . Prepare Comparative Statement of Product Cost i.e. Before Change in Tax Rate & After Change in Tax Rate and pass on the differential amount to Customer . Companies should have maintain the detailed break up of cost and input credit tax at various stages to arrive at net landed cost of product /services would be good best practice to avoid complications /litigations arising from Anti Profiteering .
      Hoping that above reply will satisfy your queries
      Best Regards
      CMA Vinod Shete

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