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China, Brazil and India cited as the most challenging countries to deal with VAT/GST: EY report

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New Delhi, 8 June, 2013 –The need for effective management of indirect taxes in rapid growth markets (RGMs) to avoid unnecessary costs and risks and maximise market opportunities is the primary concern for many multinationals, according to the EY report, Managing indirect tax in rapid growth markets. The report suggests that Governments in RGMs, like Brazil, Russia, India and China, rely on indirect taxes to bolster revenues, reduce fiscal deficits and fund infrastructure projects.

Further, multinationals are finding that indirect tax costs, formal rules, restrictive regulations and bureaucracy can be a barrier to international trade but opportunities exist to improve business outcomes, speed up deliveries and reduce costs. In countries such as India and Brazil, the application of multiple taxes and the rapidly evolving tax landscape also may increase these difficulties. Effective controls, robust processes/ documentation, standardised procedures and the use of appropriate technology can help to improve accuracy and reduce risks. In addition, collaborating across functions and geographies, and building relationships with trusted third parties and tax administrations makes the most effective use of scare resources – and helps to avoid costly and protracted disputes.

Harishanker Subramaniam, Partner & National Leader – Indirect Tax Services, EY, said, “Most RGMs have a complex indirect structure and India is no exception. With a Federal structure Indian indirect tax has a combination of both Central and State levies with no cross credit between them leading to a level of significant cascading. This has what lead to demand for GST by stakeholders for the last few years. Though recent months has seen positive developments with consensus emerging on several areas between Centre and State, implementation still looks distant and not before the formation of a new government in 2014.”  

He further added, “RGM’s like India offer a variety of tax and business incentives to attract investment in specific regions and industry sectors to offset the cost of taxes. Most states in India have a specific industrial policy and for investments which are significant, individual memorandum for incentives can be negotiated. Incentives generally are around VAT, CST, Entry Tax concessions/exemptions through deferral and refund mechanisms; besides that, states also provide concessions on land, stamp and electricity duties. Another possible way to reduce the tax burden is to set up units in a Special Economic Zone (SEZ)”.

Also, VAT/GST rates globally are rising and have been for several years. Yet, at around12.69%, the average standard VAT/GST rate across RGMs is far lower than the overall average rates in country groupings that contain advanced economies, such as the EU (21.24%) and the OECD (18.89%), and is generally lower than the worldwide average (15.89%).  In Brazil, China, India and Russia, while consumption tax rates may be lower than in the EU, the cost impact of these taxes on businesses may actually be higher due to “tax leakage” arising, for example, from not being able to offset indirect taxes on inputs against taxes charged on sales.

VAT/GST issues related to operating in RGMs, includes the following:

  • Multiple state and/or local consumption tax systems: China, Brazil and India were frequently cited as the most challenging countries to deal with VAT/GST, because of the complex nature of their systems which involve multiple taxes, frequently levied by different taxing authorities (e.g., at the federal and state level). The complex rules in these countries are often also associated with heavy penalties for non-compliance.
  • VAT/GST reforms: Changes in the VAT/GST systems in countries that are undergoing tax reforms, need to be fully integrated into companies’ pricing decisions and their invoicing and reporting systems. Rapid changes and new legislation can create uncertainty and increase the risk of errors and incurring penalties. The uncertainty may increase in RGMs such as India and Malaysia, where a VAT/GST reform is planned but the exact details and the implementation date are unclear.
  • VAT/GST recovery: The rules for VAT/GST recovery in a number of RGMs such as China, India and Russia are not in line with the principle that applies in other VAT/GST systems that all input tax is set against output tax. As a result, most companies incur VAT/GST costs when operating in these countries, which need to be factored into pricing structures and which may reduce expected profitability. In India, central levies and state levies cannot be offset against one another. In China, most export companies experience an element of “VAT leakage.”

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