Klaus Maier | Founder & Managing Director| Maier+Vidorno
First published in the magazine “Steuermarkt” published by JUVE in June 2017. The interview was conducted by Stephan Mittelhäuser.
In March, the Indian Parliament opened the way for one of the largest tax reforms in the country’s history. With the Goods and Services Tax (“GST”), there will be a uniform tax on goods and services in India from July onwards. Klaus Maier, founder and managing director of Maier+Vidorno, a consulting company specialized in India, talks to JUVE about the resulting opportunities for the economy and the challenges for companies.
JUVE: Which meaning does the introduction of GST have in India?
Klaus Maier: The introduction of GST is celebrated in India as the largest project since the opening of the economy in 1991. The aim of the reform is the harmonization of the complex indirect taxation and the establishment of a common market with a free movement of goods and services. In future, GST will provide a uniform tax on goods and services nationwide. In the past, there was a separate value added tax for services, sales and production, which could only be partially offset against one another and thus, produced a cascade effect, which made the products extremely expensive.
How does the new tax reform look like in detail? What are the differences compared to the current system?
The central government in New Delhi and the 29 states receive most of their income through indirect taxes, as only 3 % of the population pays income tax. The indirect tax law, however, is similar to a rag rug. Not only the central state, but the federal states as well as the municipalities do also collect taxes on goods and services. For example, the Central State levies taxes on the production of goods (Central Excise Duty), a service tax on services, and the Central Sales Tax on goods transport, which exceeds national borders. The federal states, in turn, generate their revenues mainly with the value-added tax, a value-added tax, depending on the state, on the sale of goods within the federal states. There are also numerous federal and municipal entry taxes or so-called octrois, which means taxes for the entry into cities. The GST will create a uniform system of indirect taxation across the country and ensure greater transparency and efficiency in domestic goods traffic.
What is the timeframe given by the Indian Government for the introduction of GST?
On the occasion of the budget announcement for the fiscal year 2017/18, the government confirmed the plan to stick to the introduction on 1st July. However, the detailed tax rates have not yet been established. It is currently assumed that the GST will have a four-part structure: a standard rate of 12 and 18 % for goods and services, a reduced rate of 5 % on goods such as basic foodstuffs, and a rate of 28 % on luxury articles. A detailed list has not yet been published by the Indian Government.
In future, there will be one GST on central and state level with 4 different tax rates?
No, not really. Due to the federal structure of India, GST is divided once again. In taxes of the central government (CGST), the federal states (SGST) as well as in an integrated tax (IGST). Relevant for the application is the location of the goods delivery or of the service recipient. For example, if a service is performed within a federal state, the CGST and SGST are each to be applied at 50 %. IGST is used for two states. However, the tax rates applied are uniform. Import duties such as classic customs, the stamp duty and taxes on certain products, such as tobacco, electricity or alcoholic beverages remain. Therefore, the import load remains the same. The rules for the special economic zones, which means a tax rate of zero for exports from and supplies to the special economic zones, will remain.
Where do you see the biggest hurdle in the implementation?
The biggest hurdle is the very short time to implement the new system. According to the current timetable, companies have only three months to change their IT systems and adapt their accounting systems. Although companies with an annual turnover of less than two million Indian Rupees (around 30,000 Euros) do not need a registration, less than 30 percent of all companies are registered for the GST. This ratio must increase significantly. The problem: Another time shift in the introduction is only possible to a very limited extent. If this fails on 1st July, 1st September will be the last possible date, since the timeframe for the introduction of the GST, as provided for in the Constitution, will close on 16th September.
That means less time and a lot of effort.
Yes, but the reform also has many advantages. The GST reform will replace at least 17 different taxes of the Central Government and the federal states. This leads to a reduction in the previous cascade effect in the production of goods and ultimately to lower prices for the final consumer. In addition, GST authorizes the companies to deduct input tax. However, this is only possible if the suppliers fulfill their tax obligations. In the future, the receipt of a correct invoice is absolutely necessary. Due to the required transparency in the form of the documentation of purchase and sales prices, large parts of the informal sector are subject to taxation for the first time, which is a sustained expansion of the hitherto limited tax base.
Which impact do you expect on the economy?
The Indian economy will benefit greatly from the GST and will certainly grow by one or two additional percentages per year. Many call the GST “game changer”. The impact on the company is immense. Up to now, business decisions in India have tended to be seen with regard to tax optimization rather than an increases in productivity. In future, efficient processes will be more important. In addition to simplifying workflows and abolishing the artificial price increase of products, the main advantage is that the movement of goods is more efficient. In the past, it was often the case that production and distribution were planned along tax conditions and special arrangements and not according to actual needs.
Please give us an example.
Take the logistics industry. It will benefit considerably from GST, since control stops at internal borders will then be eliminated. In some cases the drivers had to wait for the check-in for days because there were errors in the transport documents. With the unification of indirect taxation, the goods will reach their destination much faster. Not only the transport, but also the storage of the goods will change. Warehouses in India have so far been designed in such a way that, as far as transports are concerned, as few national borders had to be crossed. In future, centralized and professionally managed large warehouses will be built, which is likely to benefit foreign logistics companies.
Which disadvantages will companies face in future?
First of all, the government and the company have to cope with the difficult introduction and implementation phase of the GST system. The effort is not to be underestimated. In addition, companies are faced with new burdens, since the workload for identifying, proofing and transferring taxes will initially increase. Before GST, a service company received a tax number for the whole of India. This is changing, since individual registration in the individual federal states is also compulsory for services. For each registration number, 3 tax declarations per month and an annual declaration must be submitted in future. However, companies are also given the possibility of deduction by registering. Another issue is the high dependency on IT systems – in the event of a fault or a crash of the central system, the goods traffic is severely impaired, since goods worth more than 50,000 rupees have to be verified by the electronic freight letter.