China, Brazil and India are the most challenging countries to deal with due to their complex indirect tax systems, an Ernst & Young report has said.
Multiple state and/or local consumption tax systems within China, Brazil and India are frequently cited as major reasons for the complexity which involve multiple taxes, frequently levied by different taxing authorities.
Rapid changes and new legislation also contribute to the uncertainty and increase the risk of errors.
The report – Managing Indirect Tax in Rapid Growth Markets – also argues that indirect tax costs, formal rules, restrictive regulations and bureaucracy can be barriers to international trade.
It suggests that Governments in countries with rapid growth in markets, like Brazil, Russia, India and China, rely on indirect taxes to bolster revenues, reduce fiscal deficits and fund infrastructure projects.
The need for effective management of indirect taxes in these countries, to avoid unnecessary costs and risks and maximise market opportunities is the primary concern for many multinational companies.
The report listed other issues related to VAT/GST in countries such as India, China and Brazil.
Changes in the VAT/GST systems in countries that are undergoing tax reforms need to be fully integrated into companies’ pricing decisions and their invoicing and reporting systems.
The rules for VAT/GST recovery in a number of countries such as China, India and Russia are not in line with the principle that applies in other VAT/GST systems that all input tax is set against output tax, the report added.
Indian indirect tax has a combination of both Central and State levies with no cross credit between them. This has resulted in the demand for GST by stakeholders.
Though recent months have seen positive developments, implementation stills looks distant and not before the formation of a new Government in 2014, according to Harishanker Subramaniam, Partner & National Leader, Indirect Tax Services, Ernst & Young.
The report says that effective controls, robust processes/documentation, standardised procedures and the use of appropriate technology can help improve accuracy and reduce risks.
In addition, collaborating across functions and geographies, and building relationships with trusted third parties and tax administrations makes the most effective use of scarce resources and helps to avoid costly and protracted disputes.