MAKE OR BUY DECISIONS CORPORATE TAX PLANNING

• • MAKE OR BUY DECISION
  • CORPORATE TAX PLANNING
  • MAKE OR BUY DECISIONS
  • DECISION TO MAKE OR BUY IS A COSTING DECISION AND IS ALSO INFLUENCED BY FOLLOWING FACTORS:-
  1. AVAILABILITY OF FINANCIAL RESOURCES
  2. INVESTMENT REQUIRED IN FIXED ASSETS
  3. AVAILABILITY OF SKILLED AND UNSKILLED RESOURCES
  4. AVAILABILITY OF SUPPLIERS
  5. EXISTENCE OF IDLE CAPACITY IN ORGANIZATION
  1. PRICE AT WHICH IT IS AVAILABLE IN THE MARKET
  1. SITUATION 1. NO EXTRA FIXED COST:
  2. MARGINAL COST OF PRODUCING A COMPONENT SHOULD BE COMPARED WITH MARKET PRICE.
  3. IF MC IS EQUAL OR LESS THAN PRICE THEN PRODUCE THE PRODUCT.
  4. IF MC IS GREATER THAN MARKET PRICE THEN BUY
  • EXISTENCE OF IDLE CAPACITY
  • SITUATION -2
  1. WHEN SOME EXTRA FIXED COST IS ALSO REQUIRED
  2. THEN TOTAL COST ( TFC+TVC) SHOULD BE COMPARED WITH THE MARKET PRICE. IF IT IS EQUAL OR LESS THAN MP THEN PRODUCE . OTHERWISE BUY
  3. NO EXISTENCE OF IDLE CAPACITY
  4. RELEVANT COST OF MANUFACTURE I.E. VARIABLE COST + FIXED COST + OPPORTUNITY COST SHOULD BE COMPARED WITH MP. IF IT IS LESS THAN MP THEN PRODUCE OTHERWISE PURCHASE IT.
  
  
  • PROBLEM
  •  A LTD PURCHASE 20,000 BELLS PER ANNUM FROM AN OUTSIDE SUPPLIER AT RS 5 EACH. THE MGMT FEELS THAT THESE SHOULD BE PRODUCED INSTEAD OF BUYING FROM OUTSIDE. A MACHINE COSTING RS 50,000 WILL BE REQUIRED TO MANUFACTURE THE ITEMS WITH IN THE FACTORY. THE MACHINE HAS AN ANNUAL CAPACITY WITH OF 30,000 UNITS AND LIFE OF 5 YEARS. FOLLOWING ADDITIONAL INFORMATION IS AVAILABLE
  • MATERIAL COST PER UNIT =RS 2
  • LABOUR COST PER UNIT =RS 1
  • VARIABLE OVERHEAD =100% OF LABOUR COST
  • SOLUTION
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  • TAX CONSIDERATION( NEW UNITS)
  1. EXEMPTION UNDER SEC 10AA :-FULL EXEMPTION FOR INITIAL FIVE YEARS,50% FOR A FURTHER FIVE PERIOD AND FURTHER DEDUCTION OF 50% FOR A FURTHER PERIOD OF FIVE YEARS IN CASE OF NEWLY ESTABLISHED UNDERTAKING SET UP IN SPECIAL ECONOMIC ZONE ON OR AFTER 1.4.2005
  2. DEPRECIATION UNDER SECTION 32
  3. DEDUCTION OF INTEREST ON BORROWED FUNDS
  
  
  • TAX CONSIDERATION
  1. SECTION 80IA OF THE INCOME ACT PROVIDES TAX HOLIDAYS FOR A CERTAIN PERIOD TO AN INDUSTRIAL UNDERTAKING OR ENTERPRISE CARRYING ON THE BUSINESS OF DEVELOPING, MAINTAINING & OPERATING ANY INFRASTRUCTURE FACILITY.
  2. DEDUCTION UNDER SEC 80 IAB IN RESPECT OF PROFIT AND GAINS BY AN UNDERTAKING OR AN ENTERPRISE ENGAGED IN DEVELOPMENT OF SPECIAL ECONOMIC ZONES.
  3. DEDUCTION UNDER 80-IB IN CASE OF NEWLY SET UP INDUSTRIAL UNDERTAKING IN AN INDUSTRIALLY BACKWARD STATE.
  • DEDUCTION UNDER SEC 80-IC IN CASE OF NEWLY SET UP INDUSTRIAL UNDERTAKING OR SUBSTANTIAL EXPANSION OF AN UNDERTAKING IN CERTAIN SPECIAL CATEGORY STATES.
  • DEDUCTION UNDER SECTION 80-IE IN RESPECT OF CERTAIN UNDERTAKINGS IN NORTHEASTERN STATES