New Delhi: Indirect tax costs, formal rules, restrictive regulations and bureaucracy can be barriers to international trade for multinational firms operating in rapid growing markets such as India, Russia, Brazil and Russia, a study by Ernst & Young said on Sunday.
"Multinationals are finding that indirect tax costs, formal rules, restrictive regulations and bureaucracy can be a barrier to international trade," Ernst & Young said in its report on Managing Indirect Taxes in Rapid-Growth Markets.
The report said global firms in these countries are concerned about management of indirect taxes.
"The need for effective management of indirect taxes in rapid growth markets (RGMs) to avoid unnecessary costs and risks and maximise market opportunities is the primary concern for many multinationals," it said.
The report also suggests that governments in such countries rely on indirect taxes to bolster revenues, reduce fiscal deficits and fund infrastructure projects.
However opportunities exist to improve business outcomes, speed up deliveries and reduce costs, it added.
"In countries such as India and Brazil, the application of multiple taxes and the rapidly evolving tax landscape also may increase these difficulties. Effective controls, robust processes/documentation, standardised procedures and the use of appropriate technology can help to improve accuracy and reduce risks," the report said.
Collaboration across functions and geographies, building relationships with trusted third parties and tax authorities can help make most effective use of scarce resources and avoid costly and protracted disputes, it said.
"Most RGMs have a complex indirect structure and India is no exception...This has what lead to demand for GST by stakeholders for the last few years.
"Though recent months has seen positive developments with consensus emerging on several areas between centre and state, implementation stills looks distant and not before the formation of a new government in 2014," Harishanker Subramaniam, Partner & National Leader ?Indirect Tax Services, Ernst & Young, said in the report.
The report also said that VAT (Value Added Tax) or GST (Goods and Services Tax) rates are lower in RGMs at around 12.69 percent than EU (21.24 percent) and the OECD (18.89 percent), and worldwide average (15.89 percent).
It also said that China, Brazil and India are frequently cited as the most challenging countries to deal with VAT/GST because of complex nature of their systems.
"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 uncertainty may increase in RGMs such as India and Malaysia, where a VAT/GST reform is planned but the exact details and the implementation date are unclear," it said.
It also said that rules for VAT/GST recovery in 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.
"As a result, most companies incur VAT/GST costs when operating in these countries, which need to be factored into pricing structures and which may reduce expected profitability," the E&Y report said.
First Published: Sunday, June 9, 2013, 21:15