Modi’s One-Market Dream Vexes India Inc. Seeking Clues to Taxes

  • Upper house lawmakers open way for tax a decade in the making
  • Companies brace for implementation costs as fine print awaited

India Passes Landmark Goods and Services Tax

With India close to enacting its first nation-wide sales tax, local companies are bracing for additional spending needed to align accounting processes under a more stringent regime that’s yet to be spelled out.

The toughest part: no one knows what the tax rates will be and what fine print will be written into the law. Most companies will need to completely retool their customer and vendor databases as they move to a streamlined tax structure and away from multiple state levies, according to M.S. Mani, Deloitte India’s senior director for indirect taxes.

Though the need for a national goods and services tax, or GST, has been debated for over a decade, Prime Minister Narendra Modi overcame the biggest hurdle by winning approval in parliament’s upper house for a constitutional amendment allowing the levy. India Inc. is awaiting details including the base rate, which goods will be exempt and how tax benefits in poorer states will be treated under the new rules.

“Since there is no process, no systems in place, it’s very hard to be actually prepared,” said Ajay Seth, chief financial officer of Maruti Suzuki India Ltd., the nation’s biggest carmaker. “There are multiple ambiguities and there’s only a draft law to work with,” he said, adding the process of readying systems to comply with the new norms will now begin and may take at least six months from the time the law comes into force.

The amendment needs to be passed by the lower house, where unlike the upper house, Modi’s party enjoys a majority. Then it must be ratified by at least half of the nation’s 29 states. The final law may take months to be enacted. Once cleared, it will help create one of the world’s biggest single markets, replacing at least 17 disparate state as well as federal levies, and has the potential to boost economic growth by up to 2 percentage points.

It could also be an accounting nightmare.

“Companies will need to take a hard look at their accounting procedures and softwares used,” said Mani whose firm is helping many companies bracing for the change. “GST will require a lot of preparation and detailing. It’ll not be easy on anyone.”

Malaysia, Singapore

Malaysia, which introduced its version of GST over a year back, saw rising business costs impacting cash flow and profit margins. Businesses in Singapore didn’t find it a breeze to switch to GST in 1994 either. A study commissioned by the Inland Revenue Authority of Singapore in 1995 showed that the cost of compliance was less than 0.5 percent of business revenues.

A GST rate above 22 percent will be regressive, Ashok P Hinduja, chairman of the Hinduja group of companies in India said in an e-mailed statement. “Clarity is needed on the continuance of existing exemptions” at both the center and state levels, he said.

The tax is seen benefiting consumer goods makers such as Hindustan Unilever Ltd., Colgate-Palmolive India Ltd. and Asian Paints Ltd., while it may hurt alcohol and jewelry companies, according to a July 4 Credit Suisse Group AG report.

Any new regime is bound to create some disruption when it kicks in, said Harshavardhan Neotia, president of the Federation of Indian Chambers of Commerce and Industry.

“Compliance costs are intended to reduce over time,” Neotia said. “Initially, companies may need help from consultants that may raise costs. But let the fine print come. Then we’ll break our heads over it.”

Before it's here, it's on the Bloomberg Terminal.