The Goods and Services Tax (GST) is India’s biggest indirect tax reform to date. The government expects that the GST will increase GDP growth by 1.5 to 2 percent and is extremely keen to meet the April 1, 2016 deadline. However, based on our analysis of available information, we believe that the rollout will be delayed to the fourth quarter of 2016. We also expect that the GST rate will be between 20 to 25 percent.
GST implementation will go a long way toward improving the business climate, especially at a time when the shine surrounding the Bharatiya Janata Party (BJP) government appears to be fading. Unable to pass any major reforms during its first year, the BJP hopes to push the GST bill past the Rajya Sabha during the monsoon session of Parliament (July to September 2015). The bill will consolidate all indirect taxes into the Central, State, and Integrated GST (for interstate transactions), improving efficiency and reducing the cascading effects of multiple taxes. The value-added structure also ensures increased compliance, as supply chain partners will be required to produce receipts in order to claim input tax credit.
Unanimous agreement on the benefits of GST makes this the most viable economic reform in the coming months. Multinational companies in the region therefore need to begin gearing up for the reform immediately.
The next 10 months will be critical
Despite the expected delay in the rollout, multinationals face a tight schedule ahead, as there will be a great deal to accomplish within a limited time. I have highlighted some short-term actions that companies should undertake to prepare for a GST era.
Four urgent actions for a successful transition
- Enhance IT and accounting systems: At its most fundamental level, GST is a change in India’s indirect tax system. The urgent task, therefore, is to evaluate the reform’s impact on IT and accounting. Firms should partner with software companies like SAP India to ease the transition.
- Understand and offer training on GST Network (GSTN): Tax and finance departments should familiarize themselves with GSTN—the one-stop tax portal that will provide tax filing and input credit services. Larger multinationals should also encourage their smaller suppliers to begin preparing for the switch to make supply chains more efficient.
- Engage with the government: Larger multinationals should engage with the Ministry of Finance and the chambers of commerce (CII, FICCI) to lobby for expedited disclosure of details, including rates, rules and procedures.
- Apply best practices from other countries: Multinationals should make use of experience gained and best practices learned in other countries with consolidated indirect tax systems as a way to ease the transition.
Companies need sufficient time and information to prepare for a reform of this magnitude. These four actions will be critical for a successful transition to GST.
FSG’s insights on preparing for GST
This update is part one of a three-part series on preparing for the transition to GST in India. These posts have been developed carefully based on FSG’s numerous interactions with clients and experts and will have significant value for senior executives of western multinational companies operating in India. Next week’s update: GST implications for multinationals manufacturing and importing into India.