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  • GST: Businesses have much left to do for compliance

GST: Businesses have much left to do for compliance

02 July 2017

Written by Sandhya D'Mello and published at Khaleej Times

Filed on July 1, 2017​

India has finally seen the beginning of a new tax regime era. The efforts of Prime Minister Narendra Modi's government to bring in a unified tax structure - the Goods and Services Tax - to offer a more investor-friendly and transparent economy has turned into reality.

However, as with any change that has its set of challenges, analysts in India and global markets are cautioning that businesses have to fall in line and any delay will only hurt their business interests, severely impacting revenue and profitability.

Brian Conn, regional head of VAT at BDO, said: "GST has many similarities with VAT in the UAE and what businesses in India are going through gives us some insight into what will happen in the UAE on January 1, 2018. In both countries, businesses have to make changes to things such as IT, accounts, contracts and pricing - and this is not usually a quick or easy process. What is clear from what we have seen is that many businesses in India will not be ready for the change. Those businesses run the risk of problems with customers and suppliers and, potentially, of penalties from tax authorities.

"There are still six months before VAT is introduced in the UAE. So, for most businesses, there is still time to get things into shape. But time is running out fast. Of course, for businesses with operations in both India and the GCC - and there are many such businesses in the UAE - it's a double whammy, with major changes in both countries," added Conn.

On a positive note, it's worth saying that the VAT system in the UAE is much more straightforward than the Indian GST. The rate is also lower and the UAE government seems to have taken the opportunity to apply some well thought-out reliefs in areas such as health and education. That all helps but there is still much for businesses to do, added Conn.

Edelweiss Global Asset & Wealth Management, in which the Abu Dhabi Investment Authority has a stake, feels the GST will provide a large single common market for non-resident Indians and foreign entities looking to set up businesses in India.

At present, different states in India have different tax laws. There are nearly 17 taxes that businesses pay to various authorities, making it cumbersome and expensive. GST will result in a simplified tax structure, a unified tax base and common rules and administrative procedures coming into effect across the country. It will also result in widening of the tax base to include a comprehensive list of goods and services. This will bring in transparency and encourage investments in organised sectors, helping the economy gather growth momentum.

Gold gets a boost
Nitin Jain, CEO of Edelweiss, said: "One of the sectors that will have a sizeable impact due to GST will be the gold and jewellery sector. India's move to tax gold at a rate of three per cent under GST is expected to give impetus to the UAE gold and jewellery sector. The introduction of GST will lead to a slight increase in gold prices in India and would make the UAE's thriving gold jewellery market more attractive. So, along with the 10 per cent import duty India charges on bullion, that works out to the 13 per cent price advantage at the retail level that buying gold in the UAE has for Indian shoppers."

"Our top-down analysis of various sectors indicates under mentioned sectors likely to benefit immensely on account of acceleration in a trade shift from unorganised to organised segment. Further, we envisage the profitability growth to be much higher than revenue growth, led by economies of scale/operating leverage. GST rates have been kept largely neutral for many commodities. However, there are a few exceptions and disappointments versus market expectations: rates better than expectations - cigarettes [neutral tax incidence and sin cess of five per cent specific duty as per length versus levy on complete ad valorem basis]; SUVs, coal and iron ore; capital goods; works contract; rates higher than expectations - building material, multiplexes, luxury hotels, air fare [business travel] and some FMCG categories [instant coffee, chocolate, detergents, hair creams, ayurvedic products]."

Sectors where there is a large unorganised segment will see benefits flowing towards organised players.

"We believe GST will lower logistics costs due to the decline in transit time owing to elimination of multiple check points [octroi/state borders] and consolidation of warehouses. The cement sector incurs high logistics/freight/transportation costs, as a proportion of revenue, followed by FMCG, metal and chemical/paint sectors. These sectors are likely to benefit from GST," added Jain.

Uniform tax to help
The Kuwait Financial Centre (Markaz) sees that NRIs, like most residents, will benefit from a simpler tax regime on the products they purchase in India and more importantly in their real estate transactions. The existing channels include issues of multiple taxation amounting to indirect taxes and no uniformity. NRIs having business links with India will have to comply with the change in regulations and register under the GST.

M.R. Raghu, head of research at Markaz, said: "UAE entities having trade with India will be directly subject to GST, specifically Integrated GST [IGST]. IGST governs the taxation of all goods and services that cross Indian state borders, including international shipments. The destination-based nature of GST essentially flips the indirect taxation of imports and exports. Exports out of India under GST are now zero-rated, so no tax is payable and input tax credits are claimable. However, imports under GST are taxable at the same rate as goods and services supplied from another Indian state, as IGST. With the introduction of GST, countervailing duty [CVD - generally 12.5 per cent] and special additional duty [SAD - generally four per cent] are both discontinued. As such, any imports will remain subject to basic customs duty and now also IGST. Companies will need to track their import transactions separately to be able to claim the taxes already paid."

Raghu said the industry impact will vary in each case and to quantify it now is too early.

"However, on a broad basis, we are now aware of which sector might have a higher rate compared to others. For example, the government has focused on keeping tax on items of mass consumption low. While milk, grain and cereals are exempt from GST, other products like sugar, tea, coffee and edible oil will attract just five per cent GST. The impact of GST has been a mixed bag for capital goods and the consumer sector. All capital goods and industrial intermediaries would attract 18 per cent tax instead of 28 per cent. On the other hand, a few segments in the consumer durables would see higher effective taxes. Similarly, GST on telecom and financial services will be 18 per cent, higher by three per cent from current levels."