CRISIL

1. Impact of VAT
2 March 2005
CRISIL Limited

2. Present sales tax structure
Raw material cost = Rs 1,060
Raw material = Rs 1,000 Value add = Rs 1,000
Sales tax @ 6% = Rs 60 Sales price = Rs 2,060
Sales tax @ 10% =206
Input supplier Manufacturer Dealer Retailer
Rs 60 collected
and Rs 206
paid by input paid by
supplier
manufacturer
To government 2

3. Present sales tax structure
Price to retailer = Rs 2,794
Price to dealer = Rs 2,266 Value added = Rs 500
Value added = Rs 500 Selling price of retailer = Rs 3,294
Selling price of dealer = Rs 2,766 Resale tax @ 1 %= Rs 33
Resale tax @ 1 %= Rs 28 Selling price to customer = Rs 3,327
Input supplier Manufacturer Dealer Retailer
Rs 28 collected
and Rs 33 collected
paid by dealer and paid by
retailer
To government 3

4. Value-added tax
Raw material cost = Rs 1,060
Raw material recorded = Rs 1,000
Raw material = Rs 1,000 Value add = Rs 1,000
VAT @ 6% = Rs 60 Sales price = Rs 2,000
VAT @ 10% =200
Input supplier Manufacturer Dealer Retailer
Rs 60 collected Rs 200 collected
and Rs 200 - 60 = 140
by
paid by input paid by
manufacturer
supplier manufacturer
To government
To government 4

5. Value-added tax
Price to retailer = Rs 2,750
Price to dealer = Rs 2,200 Recorded by retailer = Rs 2,500
Recorded by dealer = Rs 2,000 Value added = Rs 500
Value added = Rs 500 Selling price of retailer = Rs 3,000
Selling price of dealer = Rs 2,500 VAT @ 10 %= Rs 300
VAT @ 10 %= Rs 250 Selling price to customer = Rs 3,300
Input Supplier Manufacturer Dealer Retailer
Rs 250 collected Rs 250 collected
by by
dealer retailer
Rs 300 - 250 =
Rs 250 - 200 = 50
50
paid by
paid by
To government To government retailer 5
dealer

6. Difference in tax collections
S tages Input Manufacturer Dealer Retailer Total tax
s upplier collection
Under present sales tax 60 206 28 33 327
Under VAT 60 140 50 50 300
S ource: C RIS INFA C
6

7. VAT scenarios
S ales / Local Inter s tate S tock trans fer E xports
Inputs
Local Full input tax Full input tax Input tax credit Refund of input
credit credit in excess of 4 tax paid
per cent
allowed
Inter s tate No credit No credit No credit No credit
S tock No credit No credit No credit No credit
trans fer
Note
All inter state sales and purchases will attract a CST of 4 per cent , not
vatable
S ource: White paper on VA T
7

8. Salient points
 VAT rates are generally lower than the present
local sales tax rates
 Currently high rates – Tamil Nadu, Maharashtra, Andhra
Pradesh, Karnataka
 Currently low rates – Gujarat, Uttar Pradesh
 Tax paid by manufacturers will decrease since
VAT rates are lower and also because input
credit is available for local purchases.
 Tax payments by distributors will increase
 VAT –12.5 per cent for value added greater than 8 per cent
 VAT – 4 per cent for value added greater than 25 per cent
8

9. Salient points
 Distribution channel may also be affected because
of disclosure problems.
 Tax collection by state governments will decline
in the short term.
 The prices of items like automobiles, cement,
consumer durables may not fall; however, the
prices of products like pharmaceuticals, auto
ancillaries, etc may decrease.
9

10. Framework for
analysing industry impact
 Present LST and proposed VAT rates
 Location of manufacturing facility
 Input purchase pattern
 Sales pattern
 Concessions on inputs
 Exemptions
 Sales strategy (manufacturing vs marketing)
 Channel margins
10

11. Framework for
analysing industry impact
 Present LST and proposed VAT rates
 The higher the difference in rates at the sales point, the greater the
benefit in terms of reduced taxes (pharmaceuticals)
 Location of manufacturing facility
 Plants located in states with higher sales tax to benefit due to the
reduced rate of VAT, in case of intra-state sales (cement)
 Input purchase pattern
 Players procuring raw materials from within the state (automobiles)
to benefit due to the full input credit
 Sales pattern
 Players going in for stock transfer (automobiles) will have to realign
strategies to take into account the lost credit on the input purchases.
11

12. Framework for
analysing industry impact
 Concessions on inputs
 Input costs will increase for players (consumer durables) who
currently enjoy concessional rates lower than 4 per cent, since
their inputs will now be taxed under VAT at 4 per cent.
 Exemptions
 Current sales tax exemptions will be changed to sales tax
deferrals. Players operating in notified backward areas will be
outside the VAT net.
12

13. Framework for
analysing industry impact
 Sales strategy (manufacturing vs marketing)
 The effect on players who outsource manufacturing tasks will be
greater on account of higher taxes on value added (consumer
durable, pharma, FMCG).
 Channel margins
 The higher the channel margins and the longer the channel
length, the greater the impact.
13

14. Automobiles – Rate change
VAT rate = 12.5 %
M = Manufacturing base
M
M
Under VAT
Neutral
M
Higher than VAT 14

15. Automobiles – Impact
 Input purchase pattern: High proportion of local
purchases (average LST around 4 per cent)
 Sales pattern:
 Mostly inter-state (around 80 per cent)
 Local sales: around 20 per cent
 Channel margins:
 Dealer – 5-6 per cent for 4-wheelers
- 4 per cent for 2-wheelers
 Impact on manufacturer margins – Marginally
positive
15

16. Consumer durables – Rate change
VAT rate = 12.5 %
M = Manufacturing base
M
M
M
Under VAT
Lower than VAT
Higher than VAT 16

17. Consumer durables – Characteristics
 Input purchase pattern: Mainly inter state.
Imports: 30 per cent
 Concessional rate of around 2 per cent paid on
inputs.
 Sales pattern: Mostly inter state
 Channel margins
 Distributor mark-up – 5.5 per cent
 Dealer mark-up – 6.5 per cent
17

18. Consumer durables – Impact
 Impact on manufacturer margins – Mixed bag
 Input costs will increase for players who currently
enjoy concessional rates lower than 4 per cent,
since their inputs will now be taxed under VAT at 4
per cent.
 Prices could decline in West Bengal and Karnataka,
where the existing rate of tax is high.
 Companies using independent marketing
companies to be negatively affected (value add
at marketing end to be taxed more).
18

19. Pharmaceuticals – Rate change
VAT rate = 4 %
M = Manufacturing base
M
M M
M
M Under VAT
Zero rate
M
Higher than VAT 19

20. Pharmaceuticals – Characteristics
 Input purchase pattern: Mainly intra-state.
Imports marginal (9 per cent).
 Sales pattern: Exports – 40 per cent. Inter state – 40 per cent
 Channel margins:
 Distributor mark-up – 10-15 per cent
 Retailer margin – 20 per cent
20

21. Pharmaceutical – Impact
 Impact on manufacturer margins – Positive
 Overall benefit of 4-5 per cent.
 High competition in the domestic market.
 Recent impact of MRP-based excise duty on companies.
 Prices are expected to fall by only 1-2 per cent.
 Players using independent marketing
companies will be adversely affected (value add
at marketing end to be taxed more).
21

22. Cement – Rate change
VAT rate = 12.5 %
M = Manufacturing base
M
M M
M n.a.
M Under VAT
Lower than VAT
M
Higher than VAT 22

23. Cement – Characteristics
 Cement factories present in clusters
 Inputs like limestone sourced locally
 Channel margins:
 Distributor – 1 per cent
 Retailer – 3 per cent
 Sales pattern
 Stock transfer – 20 per cent
 Inter-state sale – 30 per cent
 Intra-state sale – 50 per cent
23

24. Cement – Impact
 Impact on manufacturer margins – Positive
 Companies in southern states to enjoy greater
benefit (India Cements, Madras Cements)
 However, benefit will not be passed on
 Favourable demand-supply balance
 Input costs for manufacturers have risen
 Prices have increased in the last 9 months by 10-15 per cent
 Gujarat – Prices to increase due to increase in
sales tax rate
24

25. Paints – Rate change
VAT rate = 12.5 %
M = Manufacturing base
M
M
Under VAT
Lower than VAT
M
Higher than VAT 25

26. Paints – Characteristics
 Input purchase pattern: Mainly interstate
purchases.
 Sales pattern: Both inter- and intra-state sales.
Exports nil.
 Channel margins:
 Dealer – 5 per cent
 Retailer – 15 per cent
26

27. Paints – Impact
 Impact on manufacturer margins – Positive
 Decorative paints segment: Prices stable
 Decorative paints
 Recent input cost hikes.
 Manufacturers margins to increase.
 Retailer margins to be strained.
 Industrial paints
 Bargaining power of OEMs better.
 Benefits from VAT will be passed on to OEMs.
27

28. FMCG – Characteristics
Food products Non-food
products
Procurement Mainly local Mainly local
Input s ales tax rates 0% 4%
Under VA T 0% 4% with credit
Location Across states Across states
Pres ent LS T avg 10 % avg 15 %
Under VA T 4% 12.50%
C hannel margins
Distributor 2% 2%
Retailer 10% 10%
S ource: C RIS INFA C
28

29. FMCG – Impact
 Food products
 Positive impact on manufacturer margins
 Benefit of around 5 per cent
 Non-food products
 Marginally positive impact on manufacturer margins
 Benefit of about 2 per cent.
 Prices will remain stable
 Since the unit price of products is small, implementing
a change in prices could give rise to coinage issues.
29

30. Thank You
Contact Details:
Phone: +91 (22) 5691 3001- 09
CRISIL Limited Fax: +91 (22) 5691 3000
www.crisil.com