The introduction of the Goods and Services Tax (GST) across the vast majority of India is a welcome step towards modernising the country’s fragmented indirect tax system.
This marks a seismic change for India, which generates new compliance, system costs to allow businesses to file digital tax returns for the first time; and uncertainty in the implementation phase. UK businesses trading with India, particularly those with Indian branches offices or subsidiaries, will need to be up to speed with the new measures which are effective from 1 July 2017.
GST has many similarities with the EU VAT system and will harmonise and simplify a fragmented system of around 10 central and state level taxes into one system of indirect taxation, which will bring a single, modern system to support trade - at least in the medium to long term.
But application is complex and the first few months will be challenging: for example, while the main GST registration threshold will be INR2m (USD31,000), states in the north-east will have a registration threshold of INR1m (USD15,500) adding complexity. In addition, there will be five rates of tax - ranging from zero to 28 per cent - with intricate rules for many types of supply.
In addition, compliance requirements are likely to be onerous, with businesses required to issue specific documents in relation to the different types of supply or transaction concerned. Understanding and applying the rules will involve negotiating a steep learning curve for most taxpayers. Many businesses will find difficulty in achieving good levels of compliance, especially at the outset, which could see some facing penalties highlighting additional financial risks. It is to be hoped that the penalty regime will be applied with a light touch to give taxpayers time to train staff, and to install and integrate new systems.
However despite implementation concerns, the replacement of multiple taxes is a welcome modernisation and the introduction of GST should bring significant economic benefits to India including a predicted 2 per cent annual uplift in output. Businesses trading with India, principally those with a presence in the country will need to ensure that they act now to ascertain their obligations and consider the practical measures on their business for these changes. Practically, this would include pricing and renegotiation of agreements, changes in reporting and supporting IT infrastructure, optimisation of supply chains, compliances and consideration of impact on cash flows and business processes.
The enactment of GST makes it clear that the long wait for major indirect tax reform in India is here; it is therefore imperative that impacted businesses address any necessary implications without delay.
For more information please contact Ian Carpenter, or your usual RSM contact.