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Indian Indirect tax system as compared to other BRICS nations

Introduction to Indirect tax system

Indirect tax, or goods and services tax (GST)) is a tax collected by an intermediary from the
person who bears the ultimate economic burden of the tax (such as the consumer). The
intermediary later files a tax return and forwards the tax proceeds to government with the return.
In this sense, the term indirect tax is contrasted with a direct tax, which is collected directly by
government from the persons on whom it is imposed. An indirect tax system may increase the
price of a good to raise the price of the products for the consumers like fuel, liquor, and cigarette
taxes.
The effective management of indirect taxes in rapid growth markets like the BRIC nations, such
as China and India is a primary concern for many multinational corporations. An indirect tax is a
tax levied on goods and services which is ultimately paid by the consumer in the form of a higher
price. Two of the more common indirect taxes are value-added tax (VAT) and goods and services
tax (GST).
Governments in rapid growth markets rely heavily on the revenue brought in by indirect taxes to
bolster revenues, reduce fiscal deficits and fund infrastructure projects. However, MNCs actively
seek to avoid any unnecessary costs and risks that are associated with indirect taxes while
desiring to maximize market opportunities which puts them at ends with the local tax
authorities.
Through effective controls, robust processes and properly standardized procedures,
however, rapid growth markets could reduce the risks associated with indirect taxes and more
accurately collect the appropriate tax amounts.
Common Indirect Tax Management Problems

Most state and/or local consumption systems feature a set of complicated rules and heavy
penalties for non-compliance;

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Indirect tax reforms tend to happen frequently, which may increase the risk of incurring
non-compliance penalties; and

The rules for indirect tax recovery differ in various regions of a given country and are
dependent on the scope of your business.

A cross country perspective

Indirect tax system in all BRICs countries vary in some or the other way. The following are the
list of BRICs countries and their respective indirect tax system is explained in a brief manner.
1. Brazil
There are detailed rules controlling the recording and processing of Brazilian transactions for
indirect tax. These include guidelines on:

Invoice requirements, including the requirement for electronic invoicing;

Foreign currency reporting and translation;

Export invoices;

Language requirements;

Credit notes and corrections; and

What accounting records must be maintained and for how long.

Brazilian indirect tax returns

Periodic returns must be submitted by companies registered for indirect taxes in Brazil. In
general, filings are monthly.

VAT refunds in Brazil

There is no function for the refund of VAT to foreign companies if not registered.

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2. Russia
Effective 1 January 2015, a new VAT return was introduced in Russia. The new VAT return
requires additional sales and purchase data, such as:

Data from the taxpayers purchase book and sales book

Data from the logbook of incoming and outgoing VAT invoices where the taxpayer acts
as an intermediary

As a result, the VAT return reporting will be on a transaction-by-transaction basis, giving the
Russian tax authorities the ability to match in the sellers VAT return with the information in the
buyers VAT return. As a result, the tax authorities will be able to identify tax payers without
performing tax audit. Case law confirms that if the seller did not account for VAT and the buyer
did not act due-diligent when accepting the seller as a supplier, this VAT can be assessed from
the buyer. On 20 August 2014, a draft law was published proposing the introduction of a new
sales tax in Russia, but on 18 September 2014, the Russian Government decided to cancel these
plans.

3. India
In India, multinationals have been plagued by similar challenges due to the countrys multiple
tax rates imposed at various levels of business activity. India has a dynamic tax landscape that is
difficult to navigate due to inconsistencies and overlaps on tax policies between the Central and
State indirect tax systems. Furthermore, adding to Indias difficult tax system, central levies and
state levies cannot be offset against each other.
Indias indirect tax regime constitutes a group of tax laws and regulations that are charged on
business activities, including the manufacture of goods and the provision of services. They
include VAT, central sales tax, central excise duty, customs duty, stamp duties and entry tax,
among others.
India has recently proposed long-awaited tax reforms that would replace most of these indirect
taxes with a single goods and services tax. The GST, which would be a uniform, flat rate, would

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ensure constant tax rates throughout the country and also simplify the indirect tax compliance
management process of many MNCs.
While procedural formalities and political issues between Central and State governments will
make it difficult to implement the proposition, the GST was expected to come into force by
2014, levied at approximately 16-20 percent but the bill is blocked by the Upper house of
parliament currently.

4. China
In its 1994 Tax Reform, China set up the coexistence of business tax (BT) and value added tax
(VAT) systems. Under this mechanism, VAT is levied on the sales and importation of tangible
goods and the provision of processing, repair and replacement services, whereas BT is levied on
the provision of other services and the transfer of intangibles and real property.
However, this coexistence has caused confusion to business enterprises due to its duplicity, and
China has begun to gradually replace BT on goods and services with VAT.
Shanghai became the first region in the country to roll out the VAT reform on January 1, 2012,
followed by Beijing in September and Jiangsu, Anhui, Fujian, Guangdong, Tianjin, Zhejiang and
Hubei later in the same year.
The reform, replacing BT with VAT in the transport sector and certain services sectors, is
designed to resolve the issue of duplicate taxation on goods and services and to promote the
development of modern service industries in China. As of February 2013, the reform has saved
more than RMB40 billion for over 1 million participating taxpayers.
However, due to the policy differences between the pilot and non-pilot region, the reform has
created some confusion and uncertainties. Pilot taxpayers have not been able to obtain special
VAT invoices from non-pilot taxpayers outside of the pilot regions to credit their input VAT, and
vice versa.
Therefore, China announced in April this year that it will expand the current VAT reform
nationwide from August 1, 2013, and more industries will be included under the pilot scope. It is

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estimated that the widening reform will save companies about RMB120 billion in tax payments
this year.

5. South Africa
Indirect taxes are taxes which are levied on transactions rather than on persons (whether
individuals or corporate).
Value Added Tax (VAT) is a broad tax made by vendors on the supply of goods and services that
is charged upon purchase. VAT must be paid irrespective of whether or not it is a capital good or
trading stock so long as the vendor uses the goods in his/her enterprise. It's compulsory for a
business to register VAT remission when the value of taxable supplies in a 12 month period
exceeds or is expected to exceed R1 million. Value Added Tax (VAT) was first introduced in
South Africa in 29 September 1991 at a rate of 10%. Currently VAT is set at 14%. If given price
on an item charged by a vendor does not mention VAT then that price is deemed to include VAT.
In 2009/10 fiscal year about 72% of the 685,523 registered VAT vendors were active. Over 55%
of VAT vendors had a turnover of less than R1 million. People who are not South African
passport holders and are not resident in South Africa are eligible to claim back VAT on movable
goods purchased in the country provided they present a tax invoice (such as a receipt) for those
goods.
The fuel levy in South Africa represents a tax paid at the pump on fuel, predominantly processed
fossils fuels like petrol and diesel. In 2011 this tax represented about 29.6% of the price of 93
octane petrol and 30.3% of the price of diesel.
5% of the total fuel price paid at the pump in South Africa goes to the Road Accident
Fund which is a state insurer that provides insurance cover to all drivers of motor vehicles in
South Africa in respect of liability incurred or damage caused as a result of a traffic collision.

Key comparisons:

Countries

Type of indirect tax

Standard rate

Reduced rates, zero

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Brazil

ICMS

7%-25%

rates, or exemptions
Reduced ICMS rates

Russia

VAT
VAT

17% to 19%
18%

Reduced

Excise Tax

exemptions
Excise

India

rates,
tax

rates

VAT

4%-15%

increased
Reduced

Service Tax

12.35%

Increased rates; Zero

rates;

rated supplies;
Exempt supplies
Zero rated supplies;
Certain abatements in
calculating the
taxable
China

value

of

VAT

17%

services
Reduced rates; Zero

Business tax

3%-5%

rated

supplies;

Exempt supplies
Increased rates;
South Africa

VAT

14%

Exempt supplies
Increasing
excise

Excise Duty

2-12%

duties

Conclusion

While greatly accelerating the pace of all their tax legislation, the worlds governments have
relied most heavily on indirect taxes for extra revenue. The "value-added tax" has been criticized
as the burden of it falls on personal end-consumers of products. Defenders argue that relating
taxation levels to income is an arbitrary standard, and that the value-added tax is in fact
a proportional tax in that people with higher income pay more in that they consume more. The
effective progressiveness or repressiveness of a VAT system can also be affected when different
classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on

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individuals, countries implementing VAT have reduced income tax on lower income-earners as
well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens
on the poor. Thus countries above have kept making changes to ensure that lower income are
protected, import of luxury goods is discouraged and people follow tax laws.