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Getting up to speed with VAT/GST in emerging markets

A whole of business change

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 greater emphasis on indirect tax reflects an overall shift from taxing goods and services at the point of supply to where they’re consumed.

A global shift

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.

  • The big danger is thinking of VAT/GST as simply a sales tax or as a fairly simple change, only affecting the tax and wider finance teams.

Issues and complexities

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:

  1. Political sensitivity - as VAT/GST systems affect consumer prices, their introduction is bound to be contentious.
  2. Price, profit and reputation - clearly, some prices will rise as a result of the tax, but companies often under-estimate the additional impact of higher systems and compliance costs.
  3. Operational challenges - from applying the tax rules to individual products through to filing and payment, the operational demands of VAT/GST are much greater than a standard sales tax.
  4. International reach - understanding VAT/GST liabilities and claims across multiple cross-border operations is proving to be increasingly difficult for multinational groups

Six fundamentals of efficient implementation

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:

  1. Instil cross-organisational awareness - VAT/GST implementation is a whole of business change, rather than just a tax or finance compliance project.
  2. Business and supply chain mapping - early evaluation of the legislation and its impact will enable issues to be addressed with enough time to minimise deficiencies ahead of a go live date.
  3. Strategic assessment/planning - business teams should look closely at the implications for pricing, marketing and supply chain management.
  4. Project governance - assess resourcing priorities and put in place a governance framework as early as possible.
  5. Project planning - all stakeholders should come together to determine time frames and key milestones.
  6. Hand over and operationalisation - it’s likely that tax, strategy and project management consultants will play a crucial role in planning and implementation. Support should include how to move to an in-house business-as-usual operation.

Be prepared

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.