Key to supply chain management
The Hindu Business Line
Partner & National Leader, Indirect Tax Services
Ernst & Young
When expanding into a rapid-growth economy such as India, few companies pay attention to the crucial area of indirect taxes.
The shifting balance of world trade from developed economies towards rapid growth markets such as India, China, Brazil and Africa has led Indian and multinational companies to shift focus accordingly. These changing patterns of world trade have a significant influence on the supply chain, which is inextricably linked to indirect taxes — cross-border (customs duty) and country taxes (value added tax or VAT/ general sales tax or GST, excise and service taxes). Effective management of these taxes, from compliance and cost perspective, is paramount.
Though companies have achieved exponential growth in these countries, there is room for improvement in the management of indirect taxes. India is a classic example of a growth market with a complex indirect tax structure, comprising both Central and State taxes, leading to inherent cascading effects. The chorus for GST to address this issue is well articulated, but it is still a distant dream owing to our divided polity and federal structure. Most people, even in mature economies, believe indirect tax is a pass-through tax, but it is not. This is more so in India, where there is a significant amount of leakage, and when managed improperly can lead to loss. Unlike income tax, indirect taxes apply to procurements, manufacture, supply and sale, irrespective of whether a business is profitable or not. Yet, it does not receive the required attention from many business leaders.
The recent Budget was characterized by the carrot-and-stick approach. On one hand, we have an amnesty scheme in service tax and, on the other, a simultaneous law with punitive measures across customs, excise and service tax — indicating the urgent need for shoring up revenues. The impact on the ground will be severely tested in coming months. Aggressive multiple audits by Revenue, including third-party audits, are the order of the day for both Central and State authorities. Fast-changing business models, technologies, and intangibles add to the complexity of statute interpretation, resulting in challenges for lower-level authorities and a plethora of litigations. Though India has a well-functioning judiciary, litigation is onerous and with no predictability of outcome even in the higher forums, as differing judgments overturn long-settled principles. So, growth in such markets comes at a price, and effective management of indirect taxes becomes extremely important from a financial, compliance and cost perspective. The key factors include:
Presence of an indirect tax expert for the right inputs, including robust documentation;
Staying connected to business — to take into account changes in business practices and legislation;
Becoming proactively involved in the planning stage of a business to ensure all indirect tax inputs — including incentive schemes, duty concessions, and exemptions — are considered to optimize investment costs;
Apply lessons learned — and adapt them. As companies move into unfamiliar markets and models, they can learn from other markets and the collective organizational experience;
Maximize internal and external resources. In an ever-changing world of tax laws, rules and jurisprudence, it is difficult for company tax professionals to be aware, and stay abreast of newer developments. An effective strategy is to attend tax forums, and establish a strong peer-to-peer network, including the effective use of external advisors;
Communicate across the organization. Indirect taxes impact a variety of corporate functions including finance, tax, legal, logistics, supply chain, real estate and operations; so communication and dissemination of information is vital.
Another trend increasingly seen in companies, to strengthen indirect tax performance, is to seek certainty of tax positions and early closure of controversy. This has brought forums such as the Authority for Advance Rulings and Settlement Commission to the fore, although with mixed results.