SAP

FINANCE TERMS

2/21/2024

Gavand Anil
BOBSTINDIA PVT LTD
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Taxation Systems in India

Taxation Systems in India 1

CGST In Details 3
SGST in Details 5

UTGST in Details 5

IGST in Details 7

Type chapter title (level 1) 4

Type chapter title (level 2) 5
Type chapter title (level 3) 6

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TAXATION SYSTEM IN INDIA:

Sure, let's delve into each of these components of the Goods and Services Tax (GST) regime
in India:
1. CGST (Central Goods and Services Tax):
 CGST is the tax collected by the Central Government on intra-state supplies of
goods and services.
 The rates of CGST are set by the Central Government and are the same across
all states.
 CGST rates vary depending on the category of goods or services and are
typically either 5%, 12%, 18%, or 28%.
 For example, essential items like food grains attract a lower rate (5%), while
luxury items may attract a higher rate (28%).
2. SGST (State Goods and Services Tax):
 SGST is the tax collected by the State Government on intra-state supplies of
goods and services.
 Like CGST, SGST rates also vary based on the category of goods or services
and are usually aligned with CGST rates.
 It is important to note that SGST is imposed in addition to CGST, and both
together make up the total GST rate for intra-state transactions.
3. IGST (Integrated Goods and Services Tax):
 IGST is the tax levied on inter-state supplies of goods and services as well as
imports into India.
 It is collected by the Central Government but is distributed between the
Centre and the destination state.
 The rate of IGST is typically the combined rate of CGST and SGST/UTGST
applicable on a particular product or service.
 IGST eliminates the complexities of determining the origin of goods and
services and ensures that the tax revenue is divided appropriately between
the Centre and the states.
4. Cess:
 Cess is an additional tax levied on certain goods and services over and above
the GST rate.
 Cess is usually imposed to fund specific government initiatives or projects. For
example, the Swachh Bharat Cess is imposed to fund sanitation and
cleanliness initiatives.
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It's important to note that the GST rates and classifications are subject to change as per the
decisions of the GST Council, which comprises representatives from both the Central and
State Governments. Additionally, some goods and services may be exempt from GST or may
attract a nil rate.

CGST (Central Goods and Services Tax) in more detail:

1. Definition:
 CGST is one of the components of the Goods and Services Tax (GST) in India.
 It is a tax levied by the Central Government on the supply of goods and
services within a state.
2. Applicability:
 CGST is applicable on all intra-state supplies of goods and services.
 It is collected by the Central Government and is part of the total GST revenue.
3. Rate:
 The rates of CGST are set by the Central Government and are uniform across
all states and union territories.
 CGST rates are typically aligned with SGST (State Goods and Services Tax)
rates, resulting in a combined GST rate for intra-state transactions.
 The rates can vary depending on the category of goods or services. As of the
latest information available, CGST rates are usually set at 5%, 12%, 18%, or
28%, depending on the nature of the product or service.
4. Input Tax Credit (ITC):
 One of the key features of the GST system is the provision of Input Tax Credit
(ITC), which allows businesses to claim credit for the taxes paid on their
purchases.
 Businesses can claim credit for the CGST paid on inputs (goods and services
used in the production process) against the CGST liability on their output
(final goods and services supplied).
 This mechanism helps in preventing the cascading effect of taxes and ensures
that taxes are levied only on the value addition at each stage of the supply
chain.
5. Compliance:

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 Businesses registered under GST need to comply with various CGST-related

provisions, including filing regular returns, payment of taxes, maintenance of
records, and undergoing audits if required.
 Non-compliance with CGST regulations can lead to penalties and legal
consequences.
6. Exemptions and Nil-Rated Supplies:
 Certain goods and services may be exempt from CGST or may attract a nil
rate. Examples include essential commodities like food grains, healthcare
services, educational services, etc.
 Exempt supplies do not attract CGST, and businesses cannot claim input tax
credit on inputs used for making such supplies.
Overall, CGST plays a crucial role in the GST framework by ensuring uniformity in taxation
across states and facilitating the seamless flow of goods and services within the country.

SGST (State Goods and Services Tax) in detail:

1. Definition:
 SGST is one of the components of the Goods and Services Tax (GST) system in
India.
 It is a tax levied by the State Governments on the supply of goods and
services within a state.
2. Applicability:
 SGST is applicable on all intra-state supplies of goods and services.
 It is collected by the State Government and forms part of the total GST
revenue.
 Each state has its own SGST law and administration, enabling states to collect
taxes on intra-state supplies independently.
3. Rate:
 The rates of SGST are determined by each individual state government.
 SGST rates are usually aligned with the rates of CGST (Central Goods and
Services Tax) applicable on the same goods or services, resulting in a
combined GST rate for intra-state transactions.

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 The rates can vary depending on the category of goods or services and the
policies of the respective state governments.
 As of the latest information available, SGST rates are typically set at 5%, 12%,
18%, or 28%, like CGST rates.
4. Input Tax Credit (ITC):
 Businesses registered under GST can claim Input Tax Credit (ITC) for the SGST
paid on their purchases against the SGST liability on their sales.
 This mechanism ensures that taxes paid at the earlier stages of the supply
chain are adjusted against the final tax liability, thereby eliminating the
cascading effect of taxes.
5. Revenue Distribution:
 The revenue collected through SGST remains with the respective state
government.
 This revenue is used by the state government to finance various
developmental and welfare activities within the state.
6. Compliance:
 Businesses registered under GST need to comply with the SGST regulations of
the state(s) where they operate.
 Compliance includes filing regular returns, payment of taxes, maintenance of
records, and undergoing audits as required by the state tax authorities.
7. Exemptions and Nil-Rated Supplies:
 Like CGST, certain goods and services may be exempt from SGST or may
attract a nil rate.
 Exempt supplies do not attract SGST, and businesses cannot claim input tax
credit on inputs used for making such supplies.
SGST plays a crucial role in the GST framework by allowing states to collect taxes on intra-
state supplies, thereby ensuring fiscal autonomy while maintaining uniformity in taxation
across the country.

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Integrated Goods and Services Tax (IGST) in detail:

1. Definition:
 IGST stands for Integrated Goods and Services Tax.
 It is a part of the Goods and Services Tax (GST) system in India.
 IGST is levied by the Central Government on inter-state supplies of goods and
services and imports into India.
2. Applicability:
 IGST is applicable when goods or services are supplied from one state to
another (inter-state transactions) or when goods are imported into India.
 It is collected by the Central Government, but a portion of it is distributed to
the destination state (where the goods or services are consumed).
3. Rate:
 The rate of IGST is usually equal to the combined rate of CGST (Central Goods
and Services Tax) and SGST (State Goods and Services Tax) applicable on the
same goods or services for intra-state transactions.
 For example, if the CGST rate is 9% and the SGST rate is 9%, the IGST rate
would typically be 18%.
 The actual rate may vary depending on the nature of the goods or services.
4. Destination Principle:
 IGST follows the destination principle, which means that the tax revenue
collected under IGST is allocated to the state where the goods or services are
consumed.
 This ensures that the tax revenue is distributed appropriately between the
exporting (origin) state and the importing (destination) state.
5. Input Tax Credit (ITC):
 Businesses can claim Input Tax Credit (ITC) for the IGST paid on their inputs
(goods and services used in the production process) against the IGST liability
on their outputs (final goods and services supplied).
 This mechanism helps in preventing the cascading effect of taxes and ensures
that taxes are levied only on the value addition at each stage of the supply
chain.
6. Compliance:

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 Businesses engaged in inter-state transactions or imports need to comply

with IGST regulations, including filing regular returns, payment of taxes,
maintenance of records, and undergoing audits as required by the Central
Government.
7. Exports:
 Export of goods or services from India is treated as a zero-rated supply under
GST.
 This means that exporters are not required to pay IGST on their exports, and
they can claim a refund of the input taxes paid on inputs used for
manufacturing or providing those goods or services.
IGST simplifies the taxation process for inter-state transactions and imports, ensures
uniformity in taxation across states, and facilitates the seamless flow of goods and services
across state borders.

UTGST stands for Union Territory Goods and Services Tax.

It is a component of the Goods and Services Tax (GST) system in India. Here's a detailed
explanation of UTGST:
1. Definition:
 UTGST is a tax levied by the Union Territory Governments on intra-territory
supplies of goods and services.
 It is similar to SGST (State Goods and Services Tax) but applicable to the Union
Territories of India instead of states.
2. Applicability:
 UTGST is applicable on all intra-territory supplies of goods and services within
the Union Territories of India.
 It is collected by the Union Territory Governments and forms part of the total
GST revenue.
3. Rate:
 The rates of UTGST are determined by the respective Union Territory
Governments.
 UTGST rates are usually aligned with the rates of CGST (Central Goods and
Services Tax) applicable on the same goods or services for intra-territory
transactions.
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 The rates can vary depending on the category of goods or services and the
policies of the respective Union Territory Governments.
4. Input Tax Credit (ITC):
 Businesses registered under GST can claim Input Tax Credit (ITC) for the
UTGST paid on their purchases against the UTGST liability on their sales.
 This mechanism allows businesses to offset the tax paid on inputs against the
tax liability on their outputs, thereby avoiding the cascading effect of taxes.
5. Compliance:
 Businesses operating within Union Territories need to comply with UTGST
regulations, including filing regular returns, payment of taxes, maintenance of
records, and undergoing audits as required by the Union Territory tax
authorities.
6. Revenue Distribution:
 The revenue collected through UTGST remains with the respective Union
Territory Governments.
 This revenue is utilized by the Union Territory Governments to finance various
developmental and welfare activities within their territories.
7. Exemptions and Nil-Rated Supplies:
 Similar to CGST and SGST, certain goods and services may be exempt from
UTGST or may attract a nil rate in the Union Territories.
UTGST plays a crucial role in the GST framework by ensuring uniformity in taxation within
the Union Territories and facilitating the seamless flow of goods and services across
territories.

The components come under 0 % percentage tax:

In the Goods and Services Tax (GST) regime in India, there are certain goods and services
that are taxed at a 0% rate. These are essentially goods and services that are considered
essential for the public and taxing them at a zero rate ensures their affordability and
accessibility. Here are some components that fall under the 0% tax rate:

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1. Basic Food Items: Most basic food items such as cereals, pulses, rice, wheat, flour,
fresh fruits, vegetables, milk, eggs, and other essential food products are taxed at 0%.
2. Healthcare Services: Healthcare services provided by hospitals, clinics, and medical
practitioners are typically exempt from GST or taxed at a 0% rate. This includes
services such as doctor consultations, diagnostic tests, medical treatment, and
surgeries.
3. Education Services: Educational services provided by schools, colleges, universities,
and other educational institutions are generally exempt from GST or taxed at a 0%
rate. This includes tuition fees, examination fees, and related services.
4. Public Transportation: Services related to public transportation, such as metro rail,
local trains, buses, and economy class air travel, are usually taxed at a 0% rate to
promote affordable mobility.
5. Export of Goods and Services: Export of goods and services from India is treated as a
zero-rated supply under GST. This means that the goods and services exported are
taxed at a 0% rate, and exporters can claim a refund of the input taxes paid on inputs
used for manufacturing or providing those goods and services.
6. Books and Newspapers: Printed books, newspapers, and periodicals are typically
taxed at a 0% rate to promote literacy and the dissemination of knowledge.
7. Some Healthcare Products: Certain healthcare products such as vaccines, lifesaving
drugs, and medical devices may also be taxed at a 0% rate to ensure affordability and
accessibility.
It's important to note that the list of goods and services taxed at 0% may vary based on
government policies and decisions. Additionally, some states may provide exemptions or
concessional rates for specific goods and services under their respective State GST laws.

The components come under 5 % percentage tax:

Several goods and services in India are subject to a 5% tax rate under the Goods and
Services Tax (GST) regime. Here are some of the key components that fall under the 5% tax
bracket:
1. Processed Food Items: Certain processed food items such as tea, coffee, edible oils,
sugar, sweets, and snacks are typically taxed at 5%.
2. Healthcare Services: Some healthcare services, including healthcare provided by
clinical establishments, are subject to a 5% GST rate. This may include diagnostic
services, medical tests, and consultations.

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3. Transportation Services: Passenger transportation services, including railway

transport (other than sleeper class), air travel in economy class, and non-AC/AC
contract carriage, are usually taxed at 5%.
4. Textiles and Apparel: Textile and apparel products such as yarn, fabrics, garments,
and made-up textile articles are generally taxed at 5%. However, certain items may
attract a higher rate depending on their classification.
5. Footwear: Footwear with a retail price of up to Rs. 1000 per pair is typically taxed at
5%. However, footwear priced above Rs. 1000 per pair may attract a higher tax rate.
6. Renewable Energy Equipment: Certain renewable energy devices and equipment,
such as solar panels, wind turbines, and biogas plants, may be taxed at a
concessional rate of 5% to promote renewable energy adoption.
7. Household Consumables: Household items such as spices, tea and coffee extracts,
condensed milk, pasta, and packaged foods are often taxed at 5%.
8. Railway Tickets: Economy class railway tickets for journeys within the country are
typically taxed at a 5% rate.
9. Ayurvedic Medicines: Certain Ayurvedic medicines and products are subject to a 5%
GST rate.
10. Hotel Accommodation: Hotel accommodation with a tariff between Rs. 1,001 and
Rs. 7,500 per night is taxed at a 5% rate. However, rates may vary for specific
categories of hotels and accommodations.
It's important to note that this list is not exhaustive, and the GST rates and classifications
may be subject to change based on government policies and decisions. Additionally, certain
goods and services may be exempt from GST or may attract a nil rate.

The components come under 12% percentage tax:

Certainly! Here are some of the key components that fall under the 12% tax bracket in India
under the Goods and Services Tax (GST) regime:
1. Processed Food Items: Some processed food items, including frozen meat products,
cheese, butter, ghee, packaged dry fruits, and fruit juices, are typically taxed at 12%.
2. Textiles and Apparel: Certain textile and apparel products such as fabrics, garments,
and made-up textile articles may be taxed at a 12% rate.

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3. Footwear: Footwear with a retail price above Rs. 1000 per pair is usually taxed at
12%. However, footwear priced below Rs. 1000 per pair may attract a lower tax rate
of 5%.
4. Household Consumables: Certain household consumables such as jams, sauces,
soups, ice cream, and instant food mixes are subject to a 12% GST rate.
5. Basic Hygiene Products: Items like toothpaste, soap, shampoo, hair oil, cosmetics,
and toiletries typically fall under the 12% tax bracket.
6. Industrial Intermediaries: Goods like industrial intermediaries such as industrial
cables, cables for insulated conductors, and transformers are generally taxed at 12%.
7. Stationery Items: Stationery products such as notebooks, diaries, pens, pencils,
erasers, and sharpeners may attract a 12% GST rate.
8. Fertilizers and Pesticides: Certain fertilizers, pesticides, and agrochemicals may be
taxed at a 12% rate.
9. Furniture and Furnishings: Furniture items such as wooden furniture, plastic
furniture, and furnishings may fall under the 12% tax bracket.
10. Electric Vehicles: Electric vehicles and related parts may be subject to a 12% GST rate
to promote the adoption of eco-friendly transportation options.
It's important to note that this list is not exhaustive, and the GST rates and classifications
may vary based on government policies and decisions. Additionally, certain goods and
services may be exempt from GST or may attract a nil rate.

The components come under 18% percentage tax:

Certainly! Here are some of the key components that fall under the 18% tax bracket in India
under the Goods and Services Tax (GST) regime:
1. Processed Food Items: Certain processed food items such as pasta, biscuits, cakes,
pastries, chocolates, chewing gum, and mineral water are typically taxed at 18%.
2. Restaurant Services: Restaurant services, including both air-conditioned and non-air-
conditioned restaurants, are subject to an 18% GST rate.
3. Consumer Durables: Various consumer durables such as refrigerators, washing
machines, air conditioners, vacuum cleaners, dishwashers, microwave ovens, and
water heaters may be taxed at 18%.
4. Electrical Goods: Electrical items like switches, wires, cables, conductors, electrical
boards, panels, and lighting fixtures may attract a 18% GST rate.

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5. Industrial Intermediaries: Certain industrial intermediaries like iron and steel

products, including iron rods, wires, angles, and steel structures, may be taxed at
18%.
6. Stationery Items: Some stationery items such as envelopes, adhesive tapes, printers,
copiers, and fax machines may fall under the 18% tax bracket.
7. Cement: Cement, a key construction material, is usually taxed at an 18% GST rate.
8. Paints and Varnishes: Products like paints, varnishes, and putty are typically taxed at
18%.
9. Telecommunication Services: Telecom services, including mobile phone services,
internet services, and broadband services, may be subject to an 18% GST rate.
10. Financial Services: Certain financial services such as banking and insurance services
may also attract an 18% GST rate.
11. Home Furnishings: Home furnishing items like carpets, rugs, curtains, bed linen, and
mattresses may fall under the 18% tax bracket.
12. Branded Garments: Branded garments with a retail price exceeding Rs. 1000 per
piece may be taxed at 18%.
It's important to note that this list is not exhaustive, and the GST rates and classifications
may vary based on government policies and decisions. Additionally, certain goods and
services may be exempt from GST or may attract a nil rate.

The components come under 28% percentage tax:

Certainly! Here are some of the key components that fall under the 28% tax bracket in India
under the Goods and Services Tax (GST) regime:
1. Luxury Goods: Various luxury goods such as high-end cars, motorcycles, yachts,
private jets, and luxury watches are typically taxed at 28%.
2. Tobacco Products: Tobacco and tobacco products, including cigarettes, cigars,
cheroots, and tobacco for smoking, are subject to a 28% GST rate.
3. Aerated Drinks: Aerated drinks, including soft drinks, carbonated beverages, and
energy drinks, are typically taxed at 28%.
4. High-end Electronics: Certain high-end electronic products such as large-screen
LED/LCD TVs, home theatre systems, gaming consoles, and digital cameras may be
taxed at 28%.

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5. Automobiles: Automobiles such as luxury cars, SUVs, and vehicles with engine
capacities exceeding certain thresholds are usually taxed at 28%.
6. Cement: Cement is subject to a 28% GST rate, although there are certain exceptions
and rates may vary for specific categories.
7. Cigarette Lighters: Lighters, including gas lighters, are typically taxed at 28%.
8. Pan Masala: Pan masala containing tobacco is subject to a 28% GST rate.
9. Sweets and Savouries: Certain high-end sweets and savouries, including those sold
under well-known brand names, may attract a 28% GST rate.
10. Alcoholic Beverages: Alcoholic beverages, although not under the GST regime
currently, are taxed by states and usually have a high tax rate, which can be
equivalent to or higher than 28%.
11. Other Luxury Items: Other luxury items such as high-end perfumes, cosmetics, and
designer clothing/accessories may fall under the 28% tax bracket.
It's important to note that this list is not exhaustive, and the GST rates and classifications
may vary based on government policies and decisions. Additionally, certain goods and
services may be exempt from GST or may attract a nil rate.

Harmonized System of Nomenclature code:

HSN (Harmonized System of Nomenclature) code is an internationally standardized system

of names and numbers used to classify traded products. It was developed by the World
Customs Organization (WCO) to facilitate international trade and simplify the classification of
goods for customs authorities, statisticians, and traders worldwide. Here's a detailed
explanation of the HSN code:
1. Classification System: The HSN code provides a systematic classification of goods
based on a hierarchical structure. It consists of a six-digit code for goods, which can
be further extended to an eight-digit or ten-digit level for more specific classification.
Each digit in the code represents a specific category, sub-category, or detail about the
product.
2. Global Standardization: The HSN system is used by over 200 countries worldwide,
making it a globally recognized standard for classifying goods in international trade.
This standardization helps in facilitating smoother cross-border transactions and
ensures uniformity in customs procedures across different countries.

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3. Uniform Tariff Classification: The HSN code helps in determining the applicable
customs duties, taxes, and regulations for imported and exported goods. Customs
authorities use the HSN code to identify the nature of goods and apply the
appropriate tariff rates and trade policies.
4. Trade Facilitation: By providing a standardized classification system, the HSN code
simplifies the documentation and procedures involved in international trade. It
reduces the likelihood of misinterpretation or misclassification of goods, thereby
minimizing delays and errors in customs clearance processes.
5. Statistical Analysis: The HSN code also serves as a basis for compiling trade statistics
at the national and international levels. Governments, international organizations,
and businesses use HSN-based trade data for analysis, policy-making, market
research, and economic planning.
6. Legal Framework: Many countries have incorporated the HSN system into their
customs laws and regulations to ensure compliance with international trade
standards. The HSN code is often referenced in trade agreements, treaties, and
domestic legislation related to customs duties, tariffs, and trade facilitation
measures.
7. Usage in GST: In India, the HSN code is used under the Goods and Services Tax (GST)
regime to classify goods for tax purposes. Businesses are required to mention the
appropriate HSN code for each product in their GST invoices and returns. The HSN
code helps in determining the GST rates applicable to different goods and ensures
consistency in tax administration.
Overall, the HSN code plays a crucial role in international trade by providing a standardized
classification system that facilitates efficient customs procedures, promotes transparency in
trade documentation, and supports statistical analysis of global trade flows.

Service Accounting Code:

Certainly! SAC (Service Accounting Code) is a system of classification developed by the

Central Board of Indirect Taxes and Customs (CBIC) to classify services under the Goods and
Services Tax (GST) regime in India. Here's a detailed explanation of the SAC code in taxation:
1. Classification System: Similar to the HSN (Harmonized System of Nomenclature)
code for goods, the SAC code provides a systematic classification of services based on
a hierarchical structure. It consists of a six-digit code for services, which can be
further extended to an eight-digit level for more specific classification. Each digit in
the code represents a specific category, sub-category, or detail about the service.

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2. Uniformity in Classification: The SAC code ensures uniformity and consistency in the
classification of services for tax purposes. It helps in accurately identifying the nature
of services provided by businesses and determining the applicable GST rates,
exemptions, and compliance requirements.
3. Taxation under GST: Under the GST regime, services are categorized into different
tax slabs based on their SAC codes. The GST rates for services are generally 5%, 12%,
18%, or 28%, depending on the nature of the service. The SAC code helps in
determining the appropriate GST rate applicable to each service.
4. Service Invoicing: Businesses providing services are required to mention the SAC
code for each service provided in their invoices and GST returns. This ensures proper
classification of services and facilitates accurate tax calculation and compliance.
5. Ease of Tax Administration: The SAC code simplifies tax administration by providing a
standardized classification system for services. It helps tax authorities in identifying
taxable services, verifying tax liabilities, conducting audits, and enforcing tax laws
effectively.
6. Statistical Analysis: The SAC-based classification of services also facilitates statistical
analysis of service sector activities, revenue collection, and economic trends.
Government agencies, policymakers, and businesses use SAC-based data for analysis,
policy formulation, and decision-making.
7. Legal Framework: The SAC system is established under the GST laws and regulations
in India. It is referenced in the GST legislation, rules, and notifications issued by the
government. Compliance with SAC requirements is mandatory for businesses
registered under GST.
Overall, the SAC code is an essential tool in taxation under the GST regime, providing a
standardized classification system for services that ensures uniformity, accuracy, and
transparency in tax administration and compliance.

Capital Expenditure (CapEx) and Operating Expenditure (OpEx):

Capital Expenditure (CapEx) and Operating Expenditure (OpEx) are two categories of
expenses that businesses incur, and they differ in terms of their nature, purpose, and
treatment in financial accounting. Here's a breakdown of the key differences between CapEx
and OpEx:
1. Nature:
 CapEx: Capital expenditures refer to investments made by a company in
acquiring, upgrading, or maintaining physical assets that are expected to
generate benefits over an extended period. These assets typically have a

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useful life beyond one accounting period. Examples include purchasing

machinery, equipment, land, buildings, or vehicles.
 OpEx: Operating expenditures, on the other hand, are day-to-day expenses
incurred by a business to maintain its ongoing operations. These expenses are
essential for running the business efficiently but do not result in the
acquisition of long-term assets. Examples include rent, utilities, salaries,
marketing expenses, and office supplies.
2. Purpose:
 CapEx: Capital expenditures are made with the intention of increasing the
productive capacity or efficiency of the business. They are strategic
investments aimed at generating future benefits, such as increased revenue,
cost savings, or improved operational capabilities.
 OpEx: Operating expenditures are incurred to sustain the regular operations
of the business. They are necessary for maintaining the current level of
business activity and supporting day-to-day functions.
3. Accounting Treatment:
 CapEx: Capital expenditures are capitalized and recorded as assets on the
balance sheet. These assets are then depreciated or amortized over their
useful life, and the associated depreciation or amortization expenses are
recognized as operating expenses (OpEx) in the income statement over time.
 OpEx: Operating expenditures are expensed immediately and deducted from
revenues in the period in which they are incurred. They are typically recorded
as expenses on the income statement and directly impact the company's net
income for the accounting period.
4. Impact on Financial Statements:
 CapEx: Capital expenditures have a long-term impact on the financial position
of the company. They affect the balance sheet by increasing the value of
assets and may result in higher depreciation expenses and lower net income
over time.
 OpEx: Operating expenditures impact the income statement directly by
reducing the company's profitability in the period in which they are incurred.
They do not affect the balance sheet as they are expensed immediately.
In summary, while both CapEx and OpEx are essential for business operations, they differ in
terms of their nature, purpose, accounting treatment, and impact on financial statements.
CapEx represents investments in long-term assets aimed at generating future benefits, while
OpEx comprises day-to-day expenses necessary for sustaining ongoing operations.

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Incoterms:
Incoterms, short for International Commercial Terms, are a set of standardized trade terms
published by the International Chamber of Commerce (ICC) that are used in international
contracts to define the responsibilities and obligations of buyers and sellers in the sale of
goods. There are several types of Incoterms, each specifying different obligations and risks
for the parties involved. Here are some of the most commonly used Incoterms along with
examples:
1. EXW - Ex Works:
 Under EXW, the seller's responsibility is to make the goods available for
pickup at their premises.
 The buyer is responsible for all transportation costs, risks, and arrangements
from the seller's premises to the final destination.
 Example: The seller agrees to sell goods EXW and informs the buyer that they
can collect the goods from their warehouse. The buyer arranges for
transportation, pays for shipping, and assumes all risks during transit.
2. FCA - Free Carrier:
 Under FCA, the seller delivers the goods, cleared for export, to the carrier
nominated by the buyer at a named place or point.
 The seller is responsible for export clearance, while the buyer assumes
responsibility once the goods are handed over to the carrier.
 Example: The seller delivers goods FCA at the port of shipment. The buyer
arranges for a freight forwarder to pick up the goods from the seller's
premises and transport them to the destination port. The buyer is responsible
for all subsequent transportation costs and risks.
3. CPT - Carriage Paid To:
 Under CPT, the seller delivers the goods to a carrier or another person
nominated by the seller at an agreed-upon place of shipment.
 The seller is responsible for arranging and paying for transportation to the
named destination, but the risk transfers to the buyer once the goods are
handed over to the carrier.
 Example: The seller agrees to sell goods CPT to the buyer's warehouse. The
seller arranges for transportation and pays for shipping to the buyer's

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destination. Once the goods are handed over to the carrier, the risk transfers
to the buyer.
4. CIP - Carriage and Insurance Paid To:
 Similar to CPT, under CIP, the seller is responsible for delivering the goods to a
carrier or another person nominated by the seller at an agreed-upon place of
shipment.
 In addition to transportation costs, the seller is also responsible for obtaining
insurance coverage against the buyer's risk of loss or damage to the goods
during transit.
 Example: The seller delivers goods CIP to the buyer's warehouse. The seller
arranges for transportation and pays for shipping and insurance to the buyer's
destination. The risk transfers to the buyer once the goods are handed over
to the carrier.
5. DAP - Delivered at Place:
 Under DAP, the seller is responsible for delivering the goods, ready for
unloading, at a named place of destination.
 The seller bears all risks and costs associated with transporting the goods to
the named destination, excluding import clearance and taxes.
 Example: The seller agrees to deliver goods DAP to the buyer's warehouse.
The seller arranges for transportation, pays for shipping, and assumes all risks
until the goods are unloaded at the buyer's destination.
6. DDP - Delivered Duty Paid:
 Under DDP, the seller is responsible for delivering the goods to the buyer,
cleared for import, at the named place of destination.
 The seller bears all risks and costs associated with transporting the goods to
the named destination, including import clearance, duties, and taxes.
 Example: The seller agrees to deliver goods DDP to the buyer's warehouse.
The seller arranges for transportation, pays for shipping, handles import
clearance, and pays all import duties and taxes. The buyer is responsible only
for unloading the goods at the destination.
These are just a few examples of Incoterms, and there are several others, each with its
specific obligations and responsibilities for buyers and sellers in international trade
transactions. It's essential for parties involved in international contracts to clearly define the
chosen Incoterm in their agreements to avoid misunderstandings and disputes.

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Payment Terms:
In material management, various payment terms are used to specify when and how
payment for goods or services will be made between the buyer and the seller. These
payment terms define the timing, method, and conditions under which payment will be
made. Here are some common types of payment terms used in material management along
with explanations and examples:
1. Cash in Advance (CIA):
 Under this payment term, the buyer makes payment to the seller before the
goods are shipped or services are rendered.
 Example: A buyer places an order for raw materials and pays the full invoice
amount upfront before the goods are dispatched from the seller's warehouse.
2. Letter of Credit (LC):
 A Letter of Credit is a financial instrument issued by the buyer's bank,
guaranteeing payment to the seller upon presentation of specified
documents.
 Example: A buyer arranges for a Letter of Credit from their bank in favor of
the seller, stating that payment will be made upon receipt of the shipping
documents as per the terms of the sales contract.
3. Document Against Payment (D/P):
 Under D/P terms, the buyer makes payment to the seller upon presentation
of shipping documents, such as a bill of lading or invoice.
 Example: A seller ships goods to a buyer and sends the shipping documents to
the buyer's bank with instructions to release them to the buyer only upon
receipt of payment.
4. Document Against Acceptance (D/A):
 In D/A terms, the buyer receives shipping documents from the seller but
makes payment at a later date, typically upon acceptance of a draft (bill of
exchange).
 Example: A seller ships goods to a buyer and presents a draft along with
shipping documents. The buyer accepts the draft, committing to make
payment on a specified future date.
5. Open Account:

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 Under open account terms, the seller ships goods or provides services to the
buyer without requiring immediate payment. Payment is made at a later
agreed-upon date.
 Example: A supplier regularly delivers materials to a manufacturing company
with payment terms of "Net 30 Days," meaning payment is due 30 days after
the invoice date.
6. Advance Payment Guarantee (APG):
 An Advance Payment Guarantee is a commitment by the seller's bank to
refund the advance payment made by the buyer in case the seller fails to
fulfill their contractual obligations.
 Example: A buyer requests an Advance Payment Guarantee from the seller's
bank to secure the advance payment made to the seller for the purchase of
machinery.
These are some of the common payment terms used in material management. The choice of
payment term depends on factors such as the nature of the transaction, the relationship
between the buyer and the seller, the level of trust, and the risk tolerance of both parties.
It's essential for buyers and sellers to agree on suitable payment terms that meet their
needs and mitigate risks effectively.

Pro forma invoice:

A pro forma invoice is a preliminary bill of sale provided by a seller to a buyer before the
delivery of goods or services. It outlines the seller's intent to deliver products or services
under specific terms and conditions. Here's a detailed explanation of the key aspects of a pro
forma invoice:
1. Purpose:
 A pro forma invoice serves several purposes:
 Provides a detailed breakdown of the cost of goods or services to be
delivered.
 Outlines the terms and conditions of the sale, including pricing,
quantities, and any applicable discounts or special arrangements.
 Allows the buyer to review and confirm the details of the transaction
before finalizing the purchase.
 Facilitates customs clearance and import/export procedures by
providing essential information about the shipment.
2. Contents:

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 A pro forma invoice typically includes the following information:

 Seller's contact information (name, address, contact details).
 Buyer's contact information (name, address, contact details).
 Invoice number and date of issuance.
 Description of the goods or services to be provided, including itemized
quantities, unit prices, and total amounts for each line item.
 Any applicable taxes, tariffs, or fees.
 Payment terms, including the due date and accepted methods of
payment.
 Shipping terms, such as the delivery method, shipping address, and
estimated delivery date.
 Any special instructions or terms of sale agreed upon between the
buyer and seller.
3. Legal Status:
 A pro forma invoice is not a legally binding document like an invoice. It does
not create accounts receivable or demand payment from the buyer.
 Instead, it serves as a preliminary agreement between the buyer and seller,
outlining the terms and conditions of the potential transaction.
4. Use Cases:
 Pro forma invoices are commonly used in international trade to provide
detailed cost estimates and facilitate customs clearance.
 They are also used in domestic transactions where buyers may require
detailed quotes or estimates before committing to a purchase.
 Pro forma invoices are often used in industries such as manufacturing,
wholesale, and distribution where customized or large-volume orders are
common.
5. Relationship with Invoice:
 A pro forma invoice precedes the issuance of a formal invoice.
 Once the buyer confirms the details outlined in the pro forma invoice and
agrees to proceed with the purchase, the seller may then generate a final
invoice based on the agreed-upon terms.
 The final invoice will reflect any adjustments or changes made to the original
pro forma invoice, such as actual quantities shipped, final prices, and any
additional charges incurred during the transaction.

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In financial terms, a credit note is a document issued by a seller (supplier) to a buyer

(customer) to indicate that a certain amount of money has been credited to the buyer's
account. It essentially serves as a form of acknowledgment or adjustment for a previous
transaction.
Credit notes are typically issued for various reasons, including:
1. Returns or Refunds: If a customer returns goods or services to the seller, or if there
are discrepancies in the quantity or quality of the delivered items, a credit note may
be issued to refund the customer or adjust the amount owed.
2. Price Adjustments: If there are pricing errors, discounts, or promotions applied
incorrectly in a previous invoice, a credit note may be issued to correct the invoice
amount.
3. Billing Disputes: In cases where there are disagreements between the buyer and
seller regarding the invoiced amount or terms of sale, a credit note may be issued to
resolve the dispute and adjust the account balance accordingly.
4. Overpayments: If a customer has made an overpayment or double payment, a credit
note may be issued to refund the excess amount.
5. Credit Memo: In some cases, credit notes are also referred to as credit memos. They
serve the same purpose of crediting the buyer's account for a specific amount.
Credit notes typically include information such as the buyer and seller details, the reason for
issuing the credit note, the amount credited, and any relevant reference numbers or invoice
details. They are important documents for maintaining accurate accounting records and
ensuring transparency in financial transactions between parties.

Different Payment Terms:

Sure, here's a more detailed explanation of different payment terms commonly used in SAP
MM (Materials Management) purchasing:
1. Immediate Payment (COD):
 Payment is due immediately upon receipt of goods or services.
 This term is often used for purchases where immediate payment is required,
such as cash transactions or small orders.
2. Net Payment Terms:

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 Net payment terms indicate that payment is due within a specified number of
days after the receipt of goods or services.
 For example, "Net 30" means payment is due 30 days after receipt of goods
or services.
3. End of Month (EOM):
 Payment is due at the end of the month following the month in which the
invoice was issued.
 For instance, if an invoice is issued in January, payment would be due at the
end of February.
4. End of Next Month (EONM):
 Payment is due at the end of the second month following the month in which
the invoice was issued.
 For example, if an invoice is issued in January, payment would be due at the
end of March.
5. Cash on Delivery (COD):
 Payment is made at the time of delivery.
 This term is commonly used for purchases where payment is made in cash
upon receipt of goods.
6. Partial Payment:
 Allows for partial payment of the invoice according to specified terms.
 Businesses can agree to pay a portion of the invoice upfront and the
remaining balance at a later date.
7. Instalments Payment:
 Payment is divided into multiple instalment’s over a specified period.
 This term is used for purchases where the buyer agrees to pay the total
amount in several smaller payments over time.
8. Milestone Payment:
 Payment is made upon completion of specific project milestones.
 For example, in a long-term project, payments may be tied to the completion
of certain phases or deliverables.
9. Advance Payment:
 Payment is made before the goods or services are received.

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 This term is used when a vendor requires upfront payment before fulfilling an
order.
10. Letter of Credit (LC):
 Payment is guaranteed by a bank upon presentation of specified documents.
 This term is commonly used in international transactions to ensure payment
security for both parties.
These payment terms can be customized and configured in SAP MM based on the specific
requirements and agreements between the buyer and the vendor. They provide flexibility
and clarity in managing procurement processes and financial transactions.

Credit Note:
In financial terms, a credit note is a document issued by a seller (supplier) to a buyer
(customer) to indicate that a certain amount of money has been credited to the buyer's
account. It essentially serves as a form of acknowledgment or adjustment for a previous
transaction.
Credit notes are typically issued for various reasons, including:
1. Returns or Refunds: If a customer returns goods or services to the seller, or if there
are discrepancies in the quantity or quality of the delivered items, a credit note may
be issued to refund the customer or adjust the amount owed.
2. Price Adjustments: If there are pricing errors, discounts, or promotions applied
incorrectly in a previous invoice, a credit note may be issued to correct the invoice
amount.
3. Billing Disputes: In cases where there are disagreements between the buyer and
seller regarding the invoiced amount or terms of sale, a credit note may be issued to
resolve the dispute and adjust the account balance accordingly.
4. Overpayments: If a customer has made an overpayment or double payment, a credit
note may be issued to refund the excess amount.
5. Credit Memo: In some cases, credit notes are also referred to as credit memos. They
serve the same purpose of crediting the buyer's account for a specific amount.
Credit notes typically include information such as the buyer and seller details, the reason for
issuing the credit note, the amount credited, and any relevant reference numbers or invoice
details. They are important documents for maintaining accurate accounting records and
ensuring transparency in financial transactions between parties.
Debit Note:
In financial terms, a debit note is a document issued by a buyer (customer) to a seller
(supplier) to inform them of a debit entry or deduction from the buyer's account. Essentially,

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it serves as a request for the seller to adjust the amount owed or to make a payment to the
buyer.
Debit notes are typically issued for various reasons, including:
1. Returns or Rejections: If the buyer returns goods to the seller or rejects them due to
defects, damages, or non-compliance with specifications, a debit note may be issued
to request a refund or a reduction in the invoice amount.
2. Price Discrepancies: If there are discrepancies between the agreed-upon price and
the invoiced price, or if the buyer was charged for items not received, a debit note
may be issued to request an adjustment to the invoice amount.
3. Overdue Payments: If the seller has not made payments for goods or services
received within the agreed-upon credit period, the buyer may issue a debit note to
remind the seller of the outstanding amount and request prompt payment.
4. Additional Charges: If there are additional charges or expenses incurred by the buyer
related to the transaction, such as freight charges, taxes, or customs duties, a debit
note may be issued to request reimbursement from the seller.
5. Adjustments: In some cases, debit notes are issued to make adjustments to previous
transactions, correct errors, or reconcile accounts.
Debit notes typically include details such as the buyer and seller information, the reason for
issuing the debit note, the amount to be debited, and any relevant reference numbers or
invoice details. They are important for maintaining accurate records of financial transactions
and for facilitating communication between buyers and sellers regarding account
adjustments or payments.

FINANCE TERMS Gavand Anil