Make or Buy

Topics: Cost, Capacity utilization, Costs Pages: 5 (1437 words) Published: April 13, 2011

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, 32, 80 IA,80 IB should be considered.

* Export: If “Make or Buy” decision is taken for exporting goods then tax incentives available under section 80 HHC 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...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Make or Buy Analysis Essay
  • Make or Buy Decision Essay
  • Essay on Outsourcing and Make-or-Buy Decisions
  • Essay on make or buy
  • Make or Buy Decision Analysis Essay
  • Make or Buy Analysis Research Paper
  • Make or Buy Essay
  • Make or Buy Strategy Essay

Become a StudyMode Member

Sign Up - It's Free