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Tax Management with reference to –
‘Make Or Buy’  Decisions

 

‘MAKE OR BUY’  DECISIONS

This 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.

It is quite natural every components or part of a car cannot be manufactured by one company. Since part manufacture involves cost, time, energy, and different kinds of technology and expertise. Therefore, in such cases company purchases parts from outside agencies. But where the cost involved in purchasing from outside market is high, then the company might go in for in house production.

Apart from costing consideration following factors also go in decision-making process :

    1. Utilizations of Capacity

    2. Inadequacy Fund

    3. Latest Technology

    4. Dependence of supplier

    5. Labor problem in the factory

What are the cost involved in making of a Pat.

  1. Fixed  Cost : Purchased of Plant etc.

  2. Variable Cost : Raw Materials, Labour, Electricity etc.

What are the cost involved in buying of a part from outside agency :

  1. Buying Cost

  2. Inventory Cost

Comparison of the above tow cost shall determine which decisions the company shall follow. But, however it should be kept in mind that while comparing Cost, common cost should not be taken into account.

It should also be noted that the cost incurred in making a product and buying a product, both involves incurring of revenue expenditure. Therefore, tax saved in both the cases are same. It comes into picture only when there is a need for extension or establishment of new unit to manufacture that new components.

Tax Consideration :

1.         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.

2.         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.

3.         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.

 
 
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