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By Ben Stupples
Aug. 3 — Multinational companies in India are better prepared than domestic firms to adopt the country’s new national sales and goods tax due to their established technology systems, tax practitioners say.
India’s upper house of parliament Aug. 3 unanimously approved the introduction of the goods and services tax system—which will be administered only through a Web-based portal—to simplify the country’s complex system of multiple indirect taxes with varying rates (see related story).
“If we have to compare apples with apples, multinationals have an advantage over those solely in the domestic industry,” said Himanshu Tewari, a partner at Mumbai-based accounting firm BMR & Associates LLP. “Larger companies have developed IT systems in place, and the experience to adapt and the knowledge to be better prepared, which will increase market share and tax efficiency.”
The small businesses that make up most of India’s economy may not have the skill or resources to migrate to GST’s electronic system, according to the Goods and Services Tax Network, a partly state-owned not-for-profit company set up in 2013 to help implement India’s GST. Multinational companies based in India, meanwhile, generally have developed IT infrastructures that will allow them to migrate and adopt the changes posed by the national tax, said Arbinder Chatwal, head of India advisory at BDO.
The GST will replace at least 17 state and federal levies, making the movement of goods cheaper and easier across a market of 1.3 billion consumers, about four times the U.S. population. While India’s parliament has yet to set the rate, GST will be levied equally at both the state and federal level, and boost India’s gross domestic product by as much as 2 percentage points, according to Finance Minister Arun Jaitley.
Once fully implemented, the new tax will go a long way toward fulfilling Prime Minister Narendra Modi’s pledge to make it easier to do business in the world’s fastest-growing major economy (41 TMIN, 3/3/15).
Yet the GST is expected to hurt India’s growth in the short term, owing to an increase in taxes on services, which account for 60 percent of India's GDP, and could also drive up consumer price index-linked inflation by 20-70 basis points in the year of implementation “due to incomplete passthrough of tax savings by companies,” said a report issued July 20 by financial services group Nomura Holdings Inc.
In the long term, Nomura predicts positive state revenue gains as GST increases the government’s tax collection, reduces the black economy and makes tax administration easier, the report said.
“We’ve been waiting for this change to happen for about the past 10 years,” said Abhishek Jain, a tax partner at EY India. “This change will create uniformity across the whole of the country, so it will be a lot easier for multinational companies to operate in India from a compliance perspective.”
“This really is an important reform,” said Jan Dehn, London-based head of research at Ashmore Group Plc, July 28 ahead of the vote—the group manages $51 billion in emerging markets.
“It would dramatically increase efficiency in the country and could lead to a wave of mergers and acquisitions,” Dehn said. “India’s home market is huge, but fragmented. GST would unify it.”
Modi’s top economic adviser and the main opposition Congress party want to cap the GST rate at around 18 percent, while some states want a higher levy. Globally, rates for similar consumption taxes range from 5 percent to 27 percent, and the median for OECD countries is about 20 percent. Infosys Ltd., India’s second-largest IT company by market capitalization, secured the contract in September 2015 to develop GST’s technology platform in a 140 billion rupee deal ($2.1 billion).
In negotiations over the GST, some state governments have managed to exempt chief revenue-generating products such as alcohol, petroleum and real estate. The GST Council may also decide to tax certain luxuries—such as a flat-screen TV, for example—at a far higher rate than food staples.
The Indian government expects to implement GST from the start of April 2017. Yet this timeframe may be too small for a systemic change as large as that posed by GST, while there will also be uncertainty until then for the country’s tax industry, Tewari said.
“The industry will have to keep records and engage with government at every stage of process,” he said. “We will wait and watch. The stakes are high for the moment.”
To contact the reporter on this story: Ben Stupples in London at firstname.lastname@example.org
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An India Ministry of Finance FAQ is at http://www.finmin.nic.in/press_room/2016/GST_FAQ.pdf.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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