India is preparing to usher in a new goods and services tax (GST), considered to be one of the biggest economic reforms in decades for the country.
GST has been eagerly awaited by Indian businesses for more than a decade but as its launch draws closer, some companies are clamouring for it to be postponed because, they insist, they are simply not ready.
With a series of GST bills passed by the upper house of parliament earlier this month, the government says it is set to roll out the new tax system from July 1.
As the GCC prepares to introduce value-added-tax next year, it should look to India for lessons on the practical implications of a new consumption tax, experts say.
“For years, [Indian] businesses have demanded a change in the multi-layered archaic taxation system with the GST,” says Areef Patel, the vice chairman of Patel Integrated Logistics, based in Mumbai.
“However, the complexities involved in adapting to a new tax regime in a short time frame of three months has prompted calls from trade and industry to delay the tax reform. Challenges in the form of registering companies in every state of India, rewriting tariffs as per the new taxation system and rejigging working methodologies for tax compliance purposes have been cited as impediments by companies in migrating to GST.”
Mr Patel says there are several learnings that the GCC should take from India ahead of the introduction of VAT. These include: developing a consensus among stakeholders on the implementation of the tax, creating the necessary information technology infrastructure for the regime, training tax officials on its new VAT and making sure the wider population is kept informed about the tax regime.
India’s national GST will replace the country’s convoluted system of various taxes across its 29 states with a uniform tax system. Companies are optimistic that it will make doing business easier – and cheaper – because they will not be hit with higher taxes across different states.
The move is expected to add up to 2 per cent to India’s economy annually.
Rahul Garg, the founder and chief executive of Moglix, an e-commerce platform for businesses, says India could become “a case study to the world once the GST implementation is successfully carried out”. His company has developed technology to help manufacturing organisations to comply with GST.
“A US$2 trillion economy with myriads of business complexities as well as federal nuances, adopting a uniform tax is going to be a reference for many other countries,” says Mr Garg.
The new tax system will force businesses to “reinvent” themselves, including having to “reform production and logistics, improve compliance and find new business economics”, he says.
And, crucially, the regime has to be introduced “without jeopardising the business environment”.
India’s finance minister, Arun Jaitley, has said that the government is likely to approve the final rates and rules for GST on May 17 and 18. India’s GST Council has outlined a four-tier rate structure of 5, 12, 18, and 28 per cent but it remains to be decided which products will come under each of these categories.
Archit Gupta, the founder and chief executive ClearTax.com, an online tax filing portal, says one of the main things that the Gulf can learn from India is to “take a cue from Indian businesses which are still clamouring for a delayed … live date”.
He says that “the UAE authorities might fare better by giving businesses extra time to adopt the new tax regime”.
One of the obstacles that India’s new tax faces is getting the different states to agree on the fine details. The GCC could face similar disagreements when it comes to the introduction of VAT, although ultimately each country will operate its own tax system independently.
“The Gulf region … will face a similar challenge to India in balancing regional, as well as country-specific and even Emirate-specific demands for tax and compliance,” says L Badri Narayanan, a partner at Lakshmikumaran & Sridharan Attorneys, which specialises in taxation, trade and corporate law in India.
He explains that the technology backbone in India is ready but testing has just begun.
“Given that three billion transactions will be processed on the GST network every month, there is a fear that the system might not be able to support this volume of transactions.”
Large corporates are “scrambling” to make their systems GST-compliant, he says.
India’s case is infinitely more complex than that of the GCC, he says.
Sachin Jaiswal, the co-founder of Niki.ai, an artificial intelligence start-up based in Bangalore, explains that many smaller firms in India are simply not equipped with the necessary resources to handle what will be a significant change to the way that they operate.
“Nearly 70 per cent of small businesses in the country are yet to adopt digital technology in their business format and as such it is a big challenge for them,” he says. “The government should give reasonable time to traders to understand the provisions of GST and prepare themselves for smooth transition from the current regime to GST.”
Mr Jaiswal says that the GCC will have its own set of advantages and disadvantages when it comes to implementing VAT.
“The GCC VAT model would be very different from Indian GST as they don’t have to overhaul an existing system, rather introduce a moderate rate of taxation in a previously untaxed region,” he says. “Also, the Gulf region is better prepared to implement it because of better technological and logistics infrastructure. However, since there has been no previous tax administration it would be difficult to implement a system with no precedence. Companies and local businesses will have to accommodate to a system they were never used to.”
Mr Narayanan says while corporates in India are looking forward to most of the country’s indirect taxes getting merged into a common nationwide tax system, things are likely to be very different when it comes to the UAE and the wider region.
“The UAE, being a relatively untaxed jurisdiction, will face the opposite challenge, of getting people to accept and comply with the concept of getting taxed,” he says. “Since there is a dearth of a local taxation ecosystem, UAE should consider borrowing jurisprudence from other tax-friendly GST jurisdictions, so that it can be suitably tailored and applied for settling contentious disputes.”
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