Tax Planning and Managerial Decision

(MAKE or BUY )
Management decision should be based on careful consideration of all the factors, including
implication as regard to tax liability. Keeping view various tax implications that are relevant
while taking some specific management decision under different provision of Income tax Act
have dealt with:

Make or Buy:

One of the vital investment subject to the influence of tax factor is “Make or buy decision”.
Most of the companies have to decide sometimes or the other whether they should buy a part
from a market and stop making it themselves or whether they should stop buying it and start
making it. There are various consideration affecting this decision, chief of which is cost. In
other words, in making this sort of decision the various cost of making the product or part
component of product is compared with its purchase price in market. A host of other
consideration such as capacity utilization, supply position of the article to be bought, terms of
purchase, ill effect of layoffs etc. are kept in view while taking such decision. Tax planning
can be helpful in decision as regards making or buying a particular product, component
etc.

Broadly speaking, business can be of following three types:

(1) Trading Business

(2) Manufacturing Business
(3) Service Sector

The decision ‘to make or buy’ is a costing decision and is also influenced by many
general factors which are as follows:

 Availability of financial resources

 Investment required in fixed assets
 Availability of skilled and unskilled labour
 Availability of suppliers
 Existence of idle capacity in organization
 Price at which the product is available in the market
 Other miscellaneous factors

 Apart from costing considerations following factors also go in decision making

process:
 Utilization of Capacity
 Inadequacy of funds
 Latest Technology
 Dependence of Supplier
 Labor problem in the factory
  What are the cost involved in making of a part
 Fixed Cost
 Variable Cost

 What are the cost involved in buying of a part from outside agency:
 Buying cost
 Inventory cost
Comparision of both the cost shall determine which decision the company shall
follow, therefore tax saved in both the cases are same.

 Tax Consideration

 Establishing a new unit: If the decision to manufacture a part or a component

involves a setting up separate industrial unit than tax incentives available
 u/s 10a,10b = newly established unit for export of product

 32 = As per section 32 of the Income Tax Act, 1961, depreciation is allowed

on tangible assets and intangible assets owned, wholly or partly, by the
assesse and used for the purposes of business or profession.

 80 IA = a deduction of an amount equal to hundred per cent of the profits and

gains derived from such business for ten consecutive assessment years.

 ,80 IB = aimed at promoting construction of housing projects

 Export: If “Make or Buy” decision is taken for exporting goods then tax incentives
available under section 80 HHC (50% exemption) depends upon whether goods
manufactured by tax player himself are exported or goods manufactured by others are
exported by tax players.
 Sale of plant and machinery: If buying is cheaper than manufacturing and the
assessee decides to buy parts or components for a long period of time, he may like sell
the existing plant and machinery. Tax implications as specified by section 50 has to be
considered.

If the decision is taken to produce a part, then any other industrial unit to be established.
When a separate industrial unit is established then the company may get tax benefits and also
deductions under various sections to a company which decides to produce a part, are:

1. Deduction in respect of profits and gains from newly established small scale
undertakings in rural area (Sec 80 HHA)
A tax players deriving a profits and gains from a new small scale industries
undertaking set up in rural area will entitled to deduction of an amount equal to 20%
of such profits and gains. The deduction will be admissible for a period of 10 previous
 years in which the small scale industrial undertaking commences production of any
article.

2. Deduction in respect of profits and gains from industrial undertaking (Ship or

Hotel etc.): (Sec 80-1)
Under sction-80-1, a deduction will be allowed in respect of profits and gain derived
from industrial undertakings, ship or hotel established after a certain date. The
deduction will be of an amount equal to 30% of such industrial undertakings or Ship
or Hotel, If its company and 25% in categories of assesses.

3. Deduction in respect of profits and gains from newly established small scale
undertakings or Hotel business in Backward area (Sec 80 HHA)
All assesses are entitled to a deduction of 20% of the profit derived by them for new
industrial undertakings and Hotel setup in backward area. The deduction will be
allowed in respect of the ten assessment year relevant to previous year in which the
industrial undertaking begins to manufacture or produce articles.

4. Depreciation Allowance
A company which produce a part or a component will be allowed an allowance in
respect of depreciation of buildings, machinery, plant or furniture owned and used the
assesee for the purpose of business and profession.