The lack of detailed information regarding the implementation of India’s Goods and Services Tax (GST) is a source of concern for multinational corporations, and it limits their ability to prepare. Based on our analysis of available information, we believe that the GST rollout will be delayed to Q4 2016. The success of the rollout, however, will be determined by the ease of the transition. This blog post discusses some of the concerns regarding the GST that our clients and the wider business community share.
- The GST rate: The revenue neutral rate (RNR), the rate that would allow the government to maintain current tax revenues, is said to be 27 percent. The Ministry of Finance, although it concedes that 27 percent is too high, has not indicated what the actual rate might be. We expect that the rate will be between 20 and 25 percent, a compromise that would limit revenue loss while maintaining a realistic tax rate. Even so, India’s GST rate would still be higher than most countries’ indirect tax rates.
- Exemptions: Another concern is the list of products that will be exempted from the GST. Fuel and alcohol will be excluded, and tobacco may also be exempted. This is because these product categories are a subject of contention with states, which are more dependent on indirect taxes than the central government (see graph, below.) There is no clarity regarding other products that may be included in the list of exemptions. It is important for multinationals that the government keep the list of exempted products to a minimum, as a larger product base will result in a lower tax rate.
(Sources: Frontier Strategy Group analysis; Reserve Bank of India)
- Technological infrastructure: Clients are also skeptical regarding the technological infrastructure needed to ensure proper execution of GST. IT and accounting systems will undergo a complete transformation as India shifts toward electronic filing for taxes and credits. Given that a large share of the informal sector will now fall under the purview of GST, there is added pressure on the government to reveal details on filing procedures and IT requirements.
- Treatment of subsidies: Businesses are also concerned about the treatment of current tax subsidies. Companies must be aware of any tax incentives that may be offered under the new regime, which could have significant bottom line impact.
- Place of supply rules: Companies also need clear information on the place of supply rules, which determine specifics regarding what events are taxed, where the tax is paid, the tax value, and who is responsible for payment. It will be on the basis of these rules that companies will be able to begin updating internal systems and software.
- The additional 1 percent tax: The proposed 1 percent temporary interstate tax that the central government will impose to compensate states is also a concern for multinationals. This additional tax will negate the benefits of GST, distorting the common market and maintaining the status quo, under which international trade is simpler than intra-national trade.
The government should address these concerns as priority matters if it aims to successfully execute GST reforms. Without clarity on these issues, companies cannot plan ahead, resulting in ad hoc implementation next year.
FSG’s insights on preparing for GST
This update is the final post 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.
For an in-depth analysis of this topic, FSG clients can access the full report on the client portal. Not a client? Contact us to learn more.