 "Government must keep a close watch on prices and margins after GST introduction: Loraine Parkin, Grant Thornton")
London-based Loraine Parkin, partner, head of indirect tax and value chain services, APAC, Grant Thornton, relocated to Kuala Lumpur in 2014 to steer several multinational clients and Malaysian businesses through the transition to become ready for the goods and services tax (GST). Malaysia switched to the consumption-based tax system from April 1, 2015. In an interaction with Sudipto Dey, Parkin shares insights from her Malaysian experience that could be of use to businesses in India. Edited excerpts:
What sense are you getting from Indian clients on their preparedness on the GST?
Some of them are still hoping that the GST will be deferred. It is highly likely that the GST will commence on April 1 2017. Even if it is slightly delayed, it will still be introduced before September next year. Given the government’s position, it will not pass up the opportunity to bring it in. The push towards consumption tax is a global phenomenon. It is part of bringing more transparency in business.
What are the lessons for businesses in India from the Malaysian experience?
Malaysia is the last country that successfully implemented the GST. There are certain similarities and dissimilarities in the situations in Malaysia and India. Malaysia went live with its GST in its third attempt. It has been long in the making and discussed for about 12 years. Just like in India, many Malaysian businesses thought it would not come in from April 1, 2015. The Malaysian government, however, had invested in the infrastructure to manage the change.
The difference is that Malaysia had ratified the final legislation by July 2014. India is yet to ratify the final legislation. But that should not stop businesses from becoming GST-ready. In Malaysia it was an evolving environment and India will experience something similar.
When India goes live, businesses will have to do their best, and then keep refining for many months. The government has indicated, I believe, it will take a light-touch approach towards penalties. It understands that this is a huge business transformation, the tax is just a catalyst.
What challenges do you expect Indian businesses to encounter in the next three to four months?
The first challenge is whether the information technology systems are compliant and produce the right information for returns. I saw similar challenges in Malaysia. The IT systems of some businesses could not cope. It generally takes one-and-a-half to two months to get these IT platforms in place.
Businesses in India will have to start doing things in parallel. Waiting for the final Act with all the rates in place is not a good time to start your GST transformation. Businesses have to do their impact assessments to figure out where their pressure points are and where they are likely to be affected most.
Businesses may not be able to do everything by April, but they need to prioritise and have a risk register in place. Focus on things where risks are greater.
Were profiteering and inflation a concern in Malaysia too?
Profiteering a significant concern and they wanted to ensure that prices did not shoot up, adding to inflation. It is highly likely that there will be inflationary pressure on account of introduction of the GST in India. Globally, there has been an inflationary pressure wherever GST has been introduced, but it tends to level out eventually. In terms of profiteering, in Malaysia, they looked at the margins of businesses in quarters before and after introduction of the GST. Anti-profiteering legislation is important to protect consumers. The government has to keep a close watch on prices, particularly the margins.
How many businesses were ready in Malaysia at the time of the GST rollout?
You have to remember that Malaysia is a much small country and business community than India. The Malaysian government expected around 200,000 businesses to register. By March 2016, around 400,000 businesses had registered. That, I think, should be regarded as a huge success. That drove a lot of grey and black economy into the legitimate economy.
After a year of rollout, the Malaysian government conducted an exercise on pain of penalty to register businesses that had not done so earlier. The Malaysian government took a strategic approach not to levy penalties in many instances more or less for the first two years. There was a huge emphasis on education about the GST, through television, radio, on billboards, and free help to businesses. They adopted a very collaborative approach to get as many businesses as possible into the GST regime. Though almost half of the 2014 Act was about penalties, the government chose not to use it.
After a year of rollout, the Malaysian government conducted an exercise on pain of penalty to register businesses that had not done so earlier. The Malaysian government took a strategic approach not to levy penalties in many instances more or less for the first two years. There was a huge emphasis on education about the GST, through television, radio, on billboards, and free help to businesses. They adopted a very collaborative approach to get as many businesses as possible into the GST regime. Though almost half of the 2014 Act was about penalties, the government chose not to use it.
Is the demonetisation in India a drive to bring the informal economy into the organised sector?
It does. Different countries are doing it in different ways. Malaysia brought in an inspired piece of legislation on the back of the GST, the GST audit file. In practice, it is a complete download of purchase ledger, sales ledger and enables real-time auditing of all transactions.
