Tax professionals speaking at ITR’s Asia Tax Forum said that disagreements between state authorities, conflicting rulings by AARs, and lawsuits over anti-profiteering legislation are causing disputes in India. Panellists predicted a further rise in litigation as errors are picked up in the first wave of audits since the central GST was introduced in 2017.
“I am expecting a lot of action after the first round of the audit cycle,” said a head of tax at a multinational pharmaceutical company.
In its fourth year, India’s central GST, which replaced individual state taxes, has overcome some initial teething issues and is largely working well. Multinational enterprises (MNEs) are welcoming the opportunity to open factories and warehouses in any Indian state, without worrying about the tax implications.
“All that supply chain is now more within the control of the company, rather than being influenced purely by the tax decisions,” said the head of tax.
Panellists praised the Indian governments use of technology to make GST reporting more efficient. “The government in terms of technology is no less advanced as compared to business and corporate. They’re fine to put in place best-in-class infrastructure,” said Keshav Loyalka, group head of tax at Larsen & Toubro (L&T) Financial Services, sharing his personal views.
E-invoicing has streamlined processes for MNE tax teams, and the technology is working efficiently; it takes only a few seconds to create an invoice reference number (IRN) for an e-invoice.
Panellists also said that India’s technological advancements would be a model for other countries. “The whole globe is moving forwards to real-time data collections for governments,” said Karen Koh, tax director at Pernod Ricard.
With this in mind, other APAC countries can learn from India’s experience. “In the larger APAC region, this is an extremely good precedent,” said the head of tax at the pharmaceutical company.
Yet Loyalka warned that taxpayers will need to update their systems and processes to keep up with governments’ access to real-time data and data sharing between tax and customs departments.
“Businesses need to put in robust reconciliation mechanisms to handle multiple audits. Pull up your socks now to keep pace with government's digitisation speed,” he said after the event.
Meanwhile, with the first GST audit cycle underway, ITR’s panellists predicted a rise in litigation as issues are picked up. Audits were not conducted for the first two years after implementation to allow the law time to stabilise. Soon after, the COVID-19 pandemic prevented audits happening for another two years. This first audit cycle will therefore be the first real test for the GST.
Areas of GST litigation
Some issues with the GST remain, such as the power dynamic between the central authority and the state authorities. The allocation of taxing rights between states has yet to be fully clarified, and states may disagree over which portion of an MNE’s turnover relates to which state.
“The 26 state governments may be having their revenue targets as 26 distinct targets. How they will try to pull revenue from each other is to be distilled,” said the head of tax at the pharmaceutical company.
Another issue is the AARs, quasi-judicial state bodies that exist to provide certainty for taxpayers. In cases where AARs in different states arrive at different decisions, this can create more confusion for taxpayers, not less.
Disagreements between AARs over the GST rates for flavoured milk led some tax professionals to suggest scrapping AARs altogether. Panellists at the ITR webinar said that another option is to create one centralised AAR to avoid conflicts.
Meanwhile, litigation is already underway relating to the anti-profiteering measure that was introduced with the GST to protect consumers and avoid inflation, something that other countries had experienced after introducing a central GST. US companies such as Subway and Starbucks have faced disputes over allegations of profiteering.
At the same time, tax professionals warned that taxpayers in India should take steps to validate their tax returns after the government revoked a requirement for an external audit.
Changing audit requirements
GST legislation initially specified that taxpayers’ accounts must be audited annually by a third-party professional, such as a chartered accountant, who would file a reconciliation statement. India’s 2021 Budget announced that this requirement would be removed, in a decision welcomed by taxpayers because it will reduce the cost and compliance burden.
However, panellists at the ITR event cautioned that this means taxpayers must be more careful with their accounts. Taxpayers are still required to consolidate their accounts at the end of the year, but without the reassurance of a third-party verification.
“I would like to take this exemption from certification by an auditor with a pinch of salt,” said the head of tax at the pharmaceutical company. “The onus of the maker increases. For instance, my team was coming up to me and they gave me the comfort that some auditor has already verified these figures… but now the exercise is practically in-house.”
Tax professionals warned that a genuine mistake could not be picked up until three or four years later, during an audit. This means the company could be liable for the interest accrued during this time.
Some MNEs are continuing to pay for a third party to validate their accounts, to avoid future risk and give the tax team some peace of mind. “I still see that there is some scope for the industry to have those checks, not necessarily in the form of a certification but perhaps in the form of a separate exercise,” said the head of tax.
In the meantime, panellists said that taxpayers in India should be aware that this is a pivotal time for the GST, as the first round of audits continues, and litigation begins to increase.
“Be on your toes because this is just the beginning. There are lot of changes expected – rationalisation of tax rates, technology evolving at a very fast pace,” said the head of tax.
Koh added that MNE tax teams should collaborate with other departments to educate them on the tax implications of decisions, while Loyalka emphasised the importance of keeping up to date with technology.
“As a tax professional, I need to be fully geared up with technological changes, because tax is no longer only an interpretation of law,” he said.
The coming months will be an interesting time for India as GST audits continue, with a wave of litigation expected to follow. Tax directors are taking steps to minimise the risk exposure of their companies, including paying third-party auditors to verify accounts, to avoid much bigger problems in the future.
