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    Tax Management and Make - Buy Decisions

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    Yash Mittal
    The document discusses factors to consider for "make or buy" decisions, specifically regarding manufacturing parts for a finished product. It outlines costs involved in making or buying a part, and tax implications to consider, such as incentives for manufacturing, exporting, or selling plant and machinery. An example compares the costs of making vs. buying a component for electric pumping sets. Tax treatment is also covered for the sale of assets previously deducted for scientific research.

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    Tax Management and Make - Buy Decisions

    Uploaded by

    Yash Mittal
    97 views12 pages
    The document discusses factors to consider for "make or buy" decisions, specifically regarding manufacturing parts for a finished product. It outlines costs involved in making or buying a part, and tax implications to consider, such as incentives for manufacturing, exporting, or selling plant and machinery. An example compares the costs of making vs. buying a component for electric pumping sets. Tax treatment is also covered for the sale of assets previously deducted for scientific research.

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    Tax Management and Make _ Buy Decisions

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    The document discusses factors to consider for "make or buy" decisions, specifically regarding manufacturing parts for a finished product. It outlines costs involved in making or buying a part, and tax implications to consider, such as incentives for manufacturing, exporting, or selling plant and machinery. An example compares the costs of making vs. buying a component for electric pumping sets. Tax treatment is also covered for the sale of assets previously deducted for scientific research.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    97 views12 pages

    Tax Management and Make - Buy Decisions

    Uploaded by

    Yash Mittal
    The document discusses factors to consider for "make or buy" decisions, specifically regarding manufacturing parts for a finished product. It outlines costs involved in making or buying a part, and tax implications to consider, such as incentives for manufacturing, exporting, or selling plant and machinery. An example compares the costs of making vs. buying a component for electric pumping sets. Tax treatment is also covered for the sale of assets previously deducted for scientific research.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    Tax Management

    with reference to :
    ‘Make Or Buy’
    Decisions
    ‘MAKE OR BUY’ 
    DECISIONS
     applies to industries where assembly of products
    takes place to make a finished product.
     Like a manufacturing of car, where thousands of
    different parts or components are assembled to
    make a car.
    Factors for ‘Make or Buy’
     Costing
     Utilizationsof Capacity
     Inadequacy Fund
     Latest Technology
     Dependence of supplier
     Labor problem in the factory
    Cost involved in making of a Part.
     Fixed  Cost : Purchased of Plant etc.
     Variable Cost : Raw Materials, Labour, Electricity
    etc.
    Cost involved in buying of a part
    from outside agency :
     Buying Cost
     Inventory Cost
    Tax Consideration :
     Establishing a new Unit :         If the decision to manufacture a part
    or component involves a setting up a separate industrial unit than tax
    incentives available u/s 10A, 10B, 32, 80IA and 80IB should be
    considered.
     Export :           If ‘Make or Buy’ decision is taken for exporting
    goods then tax incentives available u/s 80HHC depends upon
    whether goods manufactured by taxpayer himself are exported or
    goods manufactured by others are exported by the taxpayers.
     Sale of Plant & Machinery :    If buying is cheaper than
    manufacturing and the assessee decides to buy parts or components
    for along period of time, he may like to sell the existing plant and
    machinery. Tax implication as specified by Sec. 50 has to considered.
    Where idle capacity exists in the
    existing undertaking
     When no extra fixed cost is required
    If MC <= P (Produce)
    Otherwise Buy
     When some extra cost is required

    If VC + FC <= P (Produce)
    Otherwise Buy
    Where idle capacity does not exist
     IfVC + FC + OC <= P Make it.
     Otherwise Buy it.
    Example 1
    X Ltd. Manufactures electric pumping sets. The company has the
    option to either make or buy from the market component Y used in
    manufacturing the sets.
    Option 1: The component will be manufactured on new machinery
    costing Rs. 1 lakh with a life of 10 years. Material required cost Rs
    2 per kg and wages Rs 0.30 per hour. The salary of the foreman
    employed is Rs 1500 per month and other variable overheads
    include Rs 20,000 for manufacturing 25,000 components per year.
    Material required is 25000 kgs. And requires 50,000 labour hours.
    Option 2: The component is readily available in the market @ Rs
    4.30 per piece.
    Will it be profitable to make or buy the component?
    Sale of Assets for Scientific Research
     Any capital expenditure incurred on purchase of
    asset for scientific research is allowed as
    deduction in full in the year in which such
    expenditure is incurred if the research is related to
    the business of the assessee.
    Tax treatment on sale of the asset for
    scientific research
     To dispose off the asset without using it for any
    other business purpose.
     To start using the asset for other business purposes
    when the business house stops using it for
    scientific research.
    CASE 1: To dispose off the asset without
    using it for any other business purpose.
     The sale price to the extent it is equal to the
    amount of deduction allowed u/s 35 will be treated
    as ‘Deemed income’ for the P.Y. in which such
    asset is sold.
     Capital Gain/Loss shall be calculated as:

    Capital Gain/Loss = Sale proceeds – Cost/Indexed


    cost of acquisition
    CASE 2: When such asset is used for some
    other business purpose also before sale.
     The cost of such asset shall be included in the
    relevant block of assets.
     Cost to be included = Cost of acquisition –
    Deduction claimed u/s 35
     In case whole cost has been claimed as deduction,
    the cost to be included will be NIL.

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