Emerging markets are at the forefront of the global shift from direct to indirect taxation. Reduced corporate tax rates in many countries and new or enhanced value-added-tax (VAT) or goods-and-services-tax (GST) are causing the shift.
VAT or GST implementation is invariably challenging, but there’s no need to make it any more difficult than it needs to be by leaving it until the last minute or by only involving tax and finance teams. Your entire business needs to be responsive to this change as every function, from marketing to Human Resources (HR), will be affected.
The GCC is a telling example of taxation’s direction of travel, as states that had been able to rely on oil and gas revenues for the bulk of government expenditure decide that they have to introduce VAT in the wake of subdued fuel prices. Unlike China and Malaysia, which have moved from a standard sales tax to VAT/GST, the GCC has no existing sales taxes and therefore the new tax is a cultural, as well as strategic and operational leap.
India is also looking to boost tax revenue by moving its existing sales taxes to a new harmonised GST system. But the government’s ambitions go further as GST filing and collection will be managed through a purpose-built technology network, marking the latest stage in the digitisation of public services. The challenges are heightened by the complexity of the IT demands and multitude of overlapping federal, state and inter-state GST.
Our experience of implementation in both developed and emerging markets suggests that the business impact of VAT/GST is often under-estimated, leading to under-resourcing and inadequate preparation time. In reality, there are multiple issues and complexities to consider and address:
As the differences between VAT/GST systems in India, China, the GCC and Malaysia highlight, there is no common preparation for implementation in emerging markets. But certain fundamentals apply:
The better prepared your business is, the bigger the opportunity. If you would like to discuss any of the points raised in this article a full list of our indirect tax contacts is available in our International indirect tax guide [PDF - 1.7 MB].