Elements of Supply Chain Mgt

1. Procurement (contd)
Lecture 3
Outline
• Taxation & SC
• Tax Effective SC
• HS CODES & PCT

Practical Application
– Landed Cost Calculation
– PCT Consultation
– Application & Treatment of Taxes
– CST Preparation
What is a Tax?
 Tax
A payment in money required by a
government that is unrelated to any specific
benefit or service received from the
government.
 Goals of Taxation
• Goals – raise revenue, redistribute wealth,
stabilize prices, foster economic growth, and
promote social goals
– Horizontal equity – persons in similar
circumstances should face similar tax burdens
– Vertical equity – persons with higher incomes
should pay not only more tax but also higher
percentages of their income as tax
 Direct & Indirect taxation
Direct Taxes are the taxes that are levied on the
income of individuals or organizations. They
include Income tax, corporate tax, wealth tax
and inheritance tax.

Indirect taxes are those paid by consumers

when they buy goods and services.
Why do Supply Chain Managers need to learn
about taxation?
 Taxes & Supply Chains
Tax issues permeate every aspect of Supply
Chain decisions - identifying, acquiring,
importing, manufacturing, transporting,
distributing and selling goods. Tax planning can
impact almost every aspect of the supply chain.
 Taxes & Supply Chains
The supply chain is core to how your business is
run and its costs, profit and growth. With the
increasing globalization of business, variable
taxes and duties across trading borders have a
huge impact on overall cost, supplier sourcing,
manufacturing strategies and distribution
network structure.
 Why Tax Planning in SC

Without a holistic approach to SC & taxation,

supply-chain-related tax savings will often be
left on the table. Therefore, insightful tax
planning is the basic requirement to ensure cost
savings.
 Why Consider Taxes and Duties in
Supply Chain Design?
• Balance: Successful businesses must find the
right balance between supply chain costs and
tax/duty obligations

• Lost Savings: Risk of missing out on potential

savings by not considering regional customs
regime or trade concessions

• Competitiveness: Reduced price/cost

competitiveness by not including the use of free
trade agreements
 Why Consider Taxes and Duties in
Supply Chain Design?
• Planning: Not reacting fast enough to
complicated and often dynamic rules and
regulations can have dramatic
financial/operational consequences

• Long-term Analysis: Identifying the impact of

taxes and duties in future strategic moves, such
as mergers and acquisitions and supply chain
capacity planning, can be a vital component in
building competitive advantage and global
positioning
 Why Consider Taxes and Duties in
Supply Chain Design?
• Financial Uniformity: Clearly communicating
tax and duty-related challenges and
opportunities internally is imperative in order
to most effectively design and implement
supply chain changes. While locally-focused
tax calculations may currently be taking place,
global optimization with both tax and logistics
considerations, aligned with Profit and Loss
can be a more compelling proposal to
stakeholders.
 Use Modeling Technology for Tax
Optimization
• By including tax costs and tax credits as well as
operational/logistics costs in supply chain
design, global businesses can minimize total
costs. Modeling technology can be used to:
• Optimize supply chain with holistic view of
duties and taxes and perform what-if scenario
testing on regulation changes, transfer prices,
etc.
 Use Modeling Technology for Tax
Optimization
• Re-design optimal supply chain strategy based
on regulation changes
• Quantify benefits from free trade zones and
regional trade concessions
• Measure impact from various taxes such as:
– Value-added tax (VAT)/GST
– State-to-state tax
– Corporate tax
– Inventory tax
 Tax Effective SC
TESCM, or tax-effective supply chain management,
is the process of integrating tax planning into the
overall management of your company's supply
chain, factoring in where to locate functions and
assets of your business, centralized management
and control over the risks, and which entity will
legally and economically assume the risks. It is an
operationally driven approach to tax planning,
putting in place a flexible international structure
fully aligned with the new business processes and
designed to deliver sustainable, long-term
reductions in effective tax rate.
 TESCM
Allocating functions, assets and risks to different
group companies will affect the level of profitability
of those companies; typically, that profit will be
subject to tax where the company is resident for tax
purposes.

So re-allocating functions, assets and risks - a

common feature of business change and
transformation initiatives - can alter the amount of
tax.
 TESCM
TESCM can potentially benefit any group of
companies doing business internationally, which
needs to improve operating performance or
reduce the effective tax rate.

The TESCM structure can comprise the full scope

of business processes or be limited to specific
processes of specialized entities with a narrow
range of functions and risks.
 Offshoring & Transfer Pricing
Offshoring is the relocation of a business process
from one country to another—typically an
operational process, such as manufacturing, or
supporting processes, such as accounting.

Transfer pricing is the setting of the price for goods

and services sold between controlled (or related)
legal entities within an enterprise. For example, if a
subsidiary company sells goods to a parent
company, the cost of those goods paid by the
parent to the subsidiary is the transfer price.
 Outsourcing
Outsourcing occurs when a company contracts a
specific process out to a third party, finding
someone who specializes in whatever needs to
be done.
 Difference between Outsourcing &
Offshoring

Outsourcing refers to an organization contracting

work out to a third party, while offshoring refers to
getting work done in a different country, usually to
leverage cost advantages.

The biggest difference is that while outsourcing can

be (and often is) offshored, offshoring may not
always involved outsourcing.
 Taxation in Pakistan
• Government of India Act, 1935
– the powers to levy and collect "Taxes on the sale of
goods and on advertisement" was a Provincial subject.
• 1935-Act applied to Pakistan in terms of section 8
of the Indian Independence Act, 1947
• In 1948, sales tax was made a federal levy and
the Pakistan General Sales Tax Act, 1948, was
enacted which came into effect on April 01, 1948.
 Taxation in Pakistan
• Later, the said 1948-Act, was superseded by
the Sales Tax Act, 1951 (Act No. III of 1951).
• 1960, the scope of sales tax under the 1951-
Act was extended to include sale, importation,
exportation, production, manufacture or
consumption of goods.
• In 1990, the Sales Tax Act, 1990, replaced the
1951-Act and introduced VAT-type sales
taxation on goods.
 Taxation in Pakistan
Sales Tax on services was never a subject of the Federal
Legislative List. Being a matter not included in the Federal
Legislative List or the Concurrent Legislative List in the
Constitution, the matters relating to levy and collection of
sales tax on services remained in the Provincial domain.

In 1989, when the Sales Tax Act was being drafted, its first
proposed name was Goods & Services Tax which was
immediately changed to General Sales Tax (GST) on the
realization that sales tax on services was a provincial
subject.
 Sales Tax on Services
• 18th Constitutional Amendment of 2010
• 7th NFC (National Finance Commission) Award of 2010

"The Services rendered by registered persons who were

previously subject to Federal Excise Duty (being
collected in Sales Tax mode) have now been subject to
Sales Tax by the Provinces through their legislation with
effect from 1st July, 2011. The Federal Board of Revenue
through a notification has withdrawn Federal Excise
Duty on such services effect from the same date i.e 1st
July, 2011 in order to avoid double taxation."
Taxation in Pakistan
 Business Entities in Pakistan
There are three main categories under which
businesses are registered in Pakistan. These are:
1. Sole Proprietorship;
2. Partnership
3. Companies – Private and Public
 Double Taxation
Double taxation is a taxation principle referring
to income taxes paid twice on the same source
of earned income. It can occur when income
is taxed at both the corporate level and personal
level. Double taxation also occurs in
international trade when the same income
is taxed in two different countries.
 Double Taxation
Concept of Source
Under the source principle, a State’s claim to tax income is based on
the State’s relationship to that income.

Example:
A State would invoke the source principle to tax income derived from
the extraction of mineral deposits located within its territorial
boundaries. Source taxation is generally justified on the ground that
the State has contributed to the creation of the economic
opportunities that allow the taxpayer to derive income generated
within the territorial borders of the State.
 Double Taxation
Concept of Residence
Under the residence principle, a State’s claim to tax income is
based on its relationship to the person deriving that income.

Example:
A State would invoke the residence principle to tax wages
earned by a resident of that State without reference to the
place where the wages were earned. In general, a State
invokes the residence principle to impose tax on the
worldwide income of its residents. Basing the tax on the
taxpayer’s overall capacity to pay, without reference to the
source of income, is consistent with most theories of
distributive justice.
 Double Taxation
Double tax conventions are an established way
for States to agree at the international level on a
method for reducing or eliminating the risk of
double taxation. Double taxation may occur for
any of the following reasons:
– Residence – Residence Conflict
– Source – Residence Conflict
– Source-Source Conflict
– Triangular Cases
 HS Codes
The Harmonized Commodity Description and Coding
System, popularly known as Harmonized System or HS, is
a multipurpose goods nomenclature used as the basis
for Customs tariffs and for the compilation trade statistics
all over the world.

It came into effect in 1988 and has since been developed

and maintained by the (WCO) World Customs
Organization, an independent intergovernmental
organization based in Brussels, Belgium, with over 200
member countries.
 HS Codes
Harmonized System (HS) Code:
Pakistan Customs follow the HS Code or PCT Codes (
Pakistan Customs Tariff Codes) for Classification of
Goods.
These code consist of:
– Eight digits where first two represent Chapter, and
– second two represent Sub- chapter, and
– after decimal place four digit represent code of item.
Practical Application
– Landed Cost Calculation
– PCT Consultation
– Taxes
– CST Preparation
 Next Lecture
• Customs Clearing Process
– IGM & EGM
– EIF
– GD
• Payment Modes (OA, TT, CAD, LC)
• Shipping Documents
• Contracts & Contracts Management
• Procurement Closing