INSIGHT: Three Years of Goods and Services Tax in India: What Businesses Need to Know

India is a fast-growing economy, and despite the pandemic, the country is expecting an influx of foreign direct investment (FDI) in the next few years. According to the World Investment Report 2020 by the United Nations Conference on Trade and Development (UNCTAD), India received $51 billion in foreign investment in 2019. It was also the world’s ninth largest recipient of FDI in 2019.

Still, a major pain point for global investors looking to establish their business in India is its three-year-old indirect tax regime, the Goods and Services Tax (GST), that has gained a reputation for being overly complicated.

The Positive Impact of GST in India

India recently commemorated the third anniversary of GST on July 1, 2020. GST replaced the value-added tax (VAT) and sales tax framework and subsumed 11 different indirect taxes at central and state levels under one unified tax structure. These taxes included central excise duty, duties of excise, additional duties of excise, additional duties of customs, special additional duty of customs, service tax, central surcharges, and cess, as far as they relate to supply of goods and services. It also included state indirect taxes, state VAT, central sales tax, luxury tax, entertainment and amusement tax, taxes on advertisements, purchase tax, taxes on lotteries, betting and gambling and state surcharges and cesses.

However, a uniform tax structure is not the only feather in GST’s cap: GST also helped transform the country into a unified marketplace. It changed the existing source-based tax structure into a destination-based tax structure. GST also eliminated the cascading effect of taxes, or tax on tax, migrated tax filing and tax registration practices to an online space with the GST portal, reduced the expenses for tax and regulatory compliance, and most notably, helped foster better penetration of markets and export effectiveness. It also eliminated essential areas of tax litigation such as works contracts, classification, and taxation of software.

Looking Ahead: More Work to be Done

Although India has considerably improved its overall ease of doing business ranking and has climbed to 63rd place in 2019 from 77th in 2018 ,as per the World Bank Report “Doing Business 2020,” the country has a long journey ahead when it comes to attracting more global investors, and still needs to iron out a lot of creases before companies can become part of its growing economy. Government officials also admit that there is much work to be done.

At present, there are four crucial areas where India still needs improvement:

• starting a business;
• registering property;
• enforcing contracts; and
• paying taxes.

Ideally, streamlining indirect tax policies and structural reforms can help expedite this process.

Streamlining and Structural Reform

Recently, the U.S.–India Strategic and Partnership Forum highlighted the urgent need to further streamline the indirect taxation system in India to Union Finance and Corporate Affairs Minister, Nirmala Sitharaman. Other officials have pointed to India’s opportunity amid the Covid-19 pandemic to become an integral part of new supply chain relationships if the country adjusts its policies to be more welcoming to foreign players. In the wake of constructive feedback, India has spent much of the last three years bringing about changes in policies and adjusting tax rates, including the introduction of online e-way bill generation in a bid to keep tax evasion in check and overcome logistical challenges.

India is expected to continue taking such steps in the future. Later this year, the country will be rolling out the e-invoicing system under the GST framework. This practice will help expedite invoice authentication, curb fraudulent invoicing, and facilitate invoice matching for accurate calculation of taxes. India is also looking into the use of artificial intelligence to curb tax evasion and the integration of FASTag to add to supply chain efficiency. (FASTag uses technology to make toll payments directly from a driver’s linked prepaid or bank account by affixing the tag on the windscreen of their vehicle.) The FASTag RFID system became mandatory at all National Highway Authority of India controlled toll plazas across the country last year, removing dependency on cash payments.

As more changes are implemented, GST, which is wholly based on tax technology, calls for end-to-end tax technology automation. As India continues to move away from disparate manual tax operations and make way for tax automation solutions to drive its indirect tax compliance, businesses looking to invest in India should leverage tax automation solutions that are designed around the quirks of Indian GST.

Tax automation technology solutions will enable foreign firms to keep a tab on ever-changing tax rates and regulatory changes across Central, State and Union Territory governments. GST authorities have also shown a willingness to establish an online technology-based e-office presence that will allow faster processing and better tax management for both taxpayer and government.

Many experts believe that the full benefits of GST will begin to appear from 2021 and beyond. This gives India time to bring in further improvements to the indirect tax structure, and offers international businesses enough time to plan their business operations and acclimatize to India’s indirect taxation regime. Finance Minister Nirmala Sitharaman, in the Budget 2020 reading, announced the country’s intention to continue improving the ease of business policies to attract FDI, and offered tax breaks to international companies.

While global information technology, banking and finance, and consultancy services have established ground in India for quite some time now, international single-brand and multi-brand retail companies, and e-commerce marketplaces are yet to make their mark in Indian markets. However, after the implementation of GST, and various policy reforms facilitating FDI and ease of doing business, India is becoming attractive for international retail companies. India has seen many international retail brands become a part of the Indian consumer lifestyle in the last five years, and more so since the introduction of GST.

Combining ambitious structural and operational reforms, including those like e-invoicing under GST, with clarity in manufacturing strategy, should help India attract global investment, establish a more trade-friendly connection with the world and jump-start the Make in India initiative. Further improvements in GST will emphasize automated tax solutions and advocate the digital transformation of the tax function. The fact that global technology companies are interested in investing in the world’s largest democracy, despite the unique challenges that come with the complexities of the Indian market and the Covid-19 crisis, indicates the opportunities that remain untapped.

One of the most critical facets for an international business to research before entering India will be acclimatizing to India’s tax compliance, legal, operational and technological needs. These factors will determine how well and how quickly an international business can establish ground in the country.

It is therefore a favorable time for international companies to accelerate their expansion strategies into India: however, if the Indian government is driving the need for tax automation, it is natural that foreign investors looking to enter India must follow suit.

Manjula Muthukrishnan is Managing Director, India Operations, with Avalara.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.