Why GST?

Good and service tax (GST) is estimated to be critical reform in encouraging

growth in the economy. If its introduced, GST not only make the tax system of
country greener, but GST will also help in increased compliance, increase the
revenue for government as tax, reduce the tax liability in the hands of the
consumers and make balance of trade equal by making exports competitive. As
we seen in the budget session of parliament, that the new government set out
and introduced a roadmap for the GST implementation.
The GST or the goods and service tax is a long-awaited indirect tax reform
which India has been waiting for and which is expected to work out the folds in
the existing tax system of India. GST is an comprehensive tax policy as its
cover all the other indirect tax existing in the current tax system. In simple
words, multiple tax like CENVAT, CST, SST, VAT, Service tax, Excise and
custom duty, octroi etc. will be replaced by GST.
Indirect taxes does not get much media coverage as corporation and personal
income tax, or create as much political controversy, but still they are an
important source of revenue for developing economies and one of the biggest
headaches for firms.
Here are the current challenges faced by firms related to existing indirect tax
system of India:
1. Indirect tax trends in developing economies
Indirect taxes includes value added tax (VAT), services tax, central sales
tax (CST), excise duty, custom duty, octroi etc. And management of these
multiple taxes to cut out the costs and avoid errors that lead to payment
of penalties and business disruption is important to maintain
profitability.
This is specifically true for business operating in developing country
economies like India, where pace with business developments, changing
supply chains and unfamiliar and dynamic local laws creates complexity
and risk that need to appropriately manage.
The following key indirect tax trends identified in developing economies
will therefore test companies tax departments in 2015 and beyond.

2. Rising tax risks and controversy

Firms are spending more time and money in managing tax risk and
controversy, according to EYs 2014 tax risk and controversy survey. In
spite of importance of indirect tax, many firms finance and tax managers
are confused about where the responsibility lies.
The survey of tax and finance executives in 25 jurisdiction also found,
71% of respondents from the accounting or finance department managed
indirect taxes, but 65% of people in a tax role said tax department was in
charge. The more our clients go global, the harder it is to manage
indirect tax because there are so many different global rules, says
Sergio Fontenelle, Leader of EYs Indirect Tax Practice in Brazil.

3. Tougher enforcement of records and systems

Tax audits are changing. More data is shared, and ever more tax
administrations are instituting electronic auditing of businesses financial
records and systems. Technology is helping change the method of tax
authorities by increasing the frequency and effectiveness of indirect tax
audits. Now most of the tax audits done electronically in real time.
The electronic filing of indirect tax returns and invoicing is becoming
more common. The change online can reduce the costs for firms, but it
can also increase costs if companies need to advanced their IT. Its also an
altered way to interacting with tax authorities. Some firms are not ready
for this change and neither were their IT systems.
In India, customs officials use risk-management software to spot
discrepancies in cross-border transactions, says Subramaniam. Many tax
disputes are settle in court and fines are getting tougher, he says. While
in most cases such challenges get resolved in favour of taxpayers, the
time taken for these resolutions can be significant, typically taking from
between 5 to 15 years to resolve, he adds.
4. World trade is increasing: its restrictions are too

Global trade is changing, and developing economies are playing a key

role. By 2020, Brazil, China and India are anticipated by World Trade
Organisation post more world output than Canada, France, Germany,
Italy, the UK and the US combined. For multinationals companies, this
has both business and tax implications.
As because the global trade is increases, so the number of restrictions are
also imposed. WTO data shows that G-20 -countries have adopted 1,244
trade-restricting measures since October 2008, but only 282 have been
lifted.
Sanitary and licensing requirements are increasing, and companies
complain about this because it increase their compliance costs.
As more and more companies are faced with the practicalities of crossborder business, they encounter unfamiliar indirect taxes that are
inseparably linked to trade flows and transactions. Rising excise taxes
are adding to companies tax costs, and therefore indirectly to the costs of
goods and services.
This is particularly true of environmental taxes, when they are levied on
transportation, fuel and energy all important elements of global trade.
South Africas government, for example, is expected to introduce
legislation for a new carbon tax in 2015.
A lot of large companies often dont fully understand all of the excise
duties and other indirect taxes they pay in Asia. Companies are lucky if
they have an Asia-Pacific indirect tax director. There are some positive
signs, however. The number of free trade agreements (FTAs) negotiated
and signed is growing. The WTO currently reports 604 active and
pending reciprocal regional trade agreements among its members.
5. Benefits of free trade zones
Free trade, or special economic zones, are also being used by developing
economies to foster trade and investment. While the operation and
benefits of these zones vary, three key areas of benefit can exist:
Tax exemptions or reductions, which can aid profitability
Exemptions from duties and VAT payments on imports, which can
aid cash flow
Simplified administrative procedures, which reduce compliance
costs

These trends in indirect taxes have a direct impact on those businesses operating
in, or trading with, developing economies. More than ever, it pays to proactively
manage indirect taxes. Setting a clear indirect tax strategy will help businesses
keep up to date with the rapidly changing tax environment.
6. Managing these taxes: an increasingly important role
Indirect taxes represent an important revenue source for the jurisdictions
already applying them, and more comprehensive indirect taxes have
become dominant in a rising number of jurisdictions. The spread in
VAT/GST regimes is an example.
India has one of the most complicated indirect tax systems. Its federal
government, for example, charges three rates of customs duty on
imported goods, says Harishanker Subramaniam, National Leader,
Indirect Taxes at EY in India.
State governments also charge VAT on the sale of goods. Dealing with
different tax authorities in the same country can increase a companys tax
costs. The main aim of the GST is to modernize Indias indirect tax
system. The GST would reduce the amount of tax cascading (taxes
applied at different stages of the supply chain that accumulate) for
businesses. Subramaniam believes it could significantly improve the
competitiveness of the Indian industry products and services.
Key action points

As business footprint changes, ensure that existing policies and

procedures are sufficient to manage the resulting indirect tax risks and
opportunities.

Ensure sufficient knowledge of the often fast-changing local tax laws and
confirm there is adequate control and oversight by central resources where this
knowledge is held locally.

Technology is key to effective management of indirect taxes. Confirm

that your technology supports fast-changing indirect tax laws.

VAT and GST taxes can have direct cost impacts, particularly for
industries where full refunds are not available. Make certain that processes and
compliance are correctly set to ensure that unrecoverable VAT costs and the
associated cash flows are minimized in accordance with the tax rules.

Ensure that your organization is prepared for the fact that tax
administrations are turning increased attention to the enforcement of indirect
taxes and are employing new technology tools to facilitate these audits.