Jun. 26 – The effective management of indirect taxes in rapid growth markets (RGMs) such as China and India is a primary concern for many multinational corporations (MNCs). An indirect tax is a tax levied on goods and services which is ultimately paid by the consumer in the form of a higher price. Two of the more common indirect taxes are value-added tax (VAT) and goods and services tax (GST).
Governments in RGMs rely heavily on the revenue brought in by indirect taxes to bolster revenues, reduce fiscal deficits and fund infrastructure projects. However, MNCs actively seek to avoid any unnecessary costs and risks that are associated with indirect taxes while desiring to maximize market opportunities – which puts them at ends with the local tax authorities.
Through effective controls, robust processes and properly standardized procedures, however, RGMs could reduce the risks associated with indirect taxes and more accurately collect the appropriate tax amounts.
Common Indirect Tax Management Problems
- Most state and/or local consumption systems feature a set of complicated rules and heavy penalties for non-compliance;
- Indirect tax reforms tend to happen frequently, which may increase the risk of incurring non-compliance penalties; and
- The rules for indirect tax recovery differ in various regions of a given country and are dependent on the scope of your business.
China
In its 1994 Tax Reform, China set up the coexistence of business tax (BT) and value added tax (VAT) systems. Under this mechanism, VAT is levied on the sales and importation of tangible goods and the provision of processing, repair and replacement services, whereas BT is levied on the provision of other services and the transfer of intangibles and real property.
However, this coexistence has caused confusion to business enterprises due to its duplicity, and China has begun to gradually replace BT on goods and services with VAT.
Shanghai became the first region in the country to roll out the VAT reform on January 1, 2012, followed by Beijing in September and Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang and Hubei later in the same year.
The reform, replacing BT with VAT in the transport sector and certain services sectors, is designed to resolve the issue of duplicate taxation on goods and services and to promote the development of modern service industries in China. As of February 2013, the reform has saved more than RMB40 billion for over 1 million participating taxpayers.
However, due to the policy differences between the pilot and non-pilot region, the reform has created some confusion and uncertainties. Pilot taxpayers have not been able to obtain special VAT invoices from non-pilot taxpayers outside of the pilot regions to credit their input VAT, and vice versa.
Therefore, China announced in April this year that it will expand the current VAT reform nationwide from August 1, 2013, and more industries will be included under the pilot scope. It is estimated that the widening reform will save companies about RMB120 billion in tax payments this year.
India
In India, multinationals have been plagued by similar challenges due to the country’s multiple tax rates imposed at various levels of business activity. India has a dynamic tax landscape that is difficult to navigate due to inconsistencies and overlaps on tax policies between the Central and State indirect tax systems. Furthermore, adding to India’s difficult tax system, central levies and state levies cannot be offset against each other.
India’s indirect tax regime constitutes a group of tax laws and regulations that are charged on business activities, including the manufacture of goods and the provision of services. They include VAT, central sales tax, central excise duty, customs duty, stamp duties and entry tax, among others.
India has recently proposed long-awaited tax reforms that would replace most of these indirect taxes with a single goods and services tax. The GST, which would be a uniform, flat rate, would ensure constant tax rates throughout the country and also simplify the indirect tax compliance management process of many MNCs.
While procedural formalities and political issues between Central and State governments will make it difficult to implement the proposition, the GST is expected to come into force by 2014, levied at approximately 16-20 percent.
