Singapore firms urged to make the most of India's biggest tax reform

Singapore

SINGAPORE businesses should make the most of India's biggest tax reform as the country rolls out its Goods and Services Tax (GST) in July, urged International Enterprise Singapore.

The reform means that the current indirect tax landscape and multiple existing indirect taxes, both state and federal, will be streamlined and Singapore investors will benefit from that, said Tay Lian Chew, IE Singapore regional director of South Asia.

Speaking to The Business Times, Mr Tay said that the implementation of GST was one of the most significant reforms that India's Prime Minister Narendra Modi has introduced.

"It's wide-ranging, cutting across all sectors and it's for the long term. Therefore, a lot of our companies are interested," he said, adding that this was apparent when more than 100 companies and businesses showed up at an IE Singapore seminar on India's GST, held in Singapore early last month.

But Mr Tay said that there would be teething problems and challenges at the outset.

"GST compliance will come at a cost. There will be additional work for the companies, raising operating costs. For instance, they will have to go through a lot of compliance and returns invoices will have to be filed regularly.

"But in the long run, the GST reform is positive for the Indian economy, and therefore there are ample opportunities here for Singapore companies."

Agreeing, Kelvin Law, assistant professor of accounting at the Nanyang Business School in Nanyang Technological University (NTU), said: "Switching to a different tax reporting system requires new compliance software and training during the phase-in period. In terms of product pricing, it may vary depending on the type of goods.

"However, in the long run, production costs, especially among large corporations, should go down if corporations are able to centralise their operations and streamline their distribution networks.

"Corporations should also benefit in the long run from the lower complexity of tax compliance, as the unifying system would facilitate transactions across states."

Prof Law said that, previously, businesses strategically place their manufacturing operations or distribution networks across 29 states to take advantage of local tax breaks.

"The introduction of GST is likely to mitigate firms' incentives to pursue such strategic moves. On the contrary, we should expect to see large corporations physically centralise their operations and distribution warehouses. Clustering their previously scattered business operations would lower their production costs overall."

He said that in terms of public finance, GST would solidify India's public finance system.

Indian media reported that at the close of a two-day meeting of India's Goods and Services Tax (GST) Council last month, the framework had been further tightened with fitment (an item-wise or service-wise tax rate structure) of thousands of goods and services into the tiered GST structure.

Seven services, including rail freight and construction, will face a levy of 12 per cent; while the bulk, such as banking services and insurance, IT and telecommunications, will be taxed at 18 per cent. A handful of goods or services will be taxed at 28 per cent, a mark-up from the current 15 per cent tax (including cess).

Indian officials emphasised that the new structure would be non-inflationary and revenue-neutral, especially as essential goods comprising crucial services and food have been kept out of the GST ambit.

Under the current regime, corporations with infrastructure capabilities are able to "stock transfer" and escape paying taxes on inter-state transfer and movement of goods, which SMEs and startups are not able to do.

Using a pair of shoes to illustrate the current cascading taxes in India, Mr Tay explained: "At the point of manufacture, there is the excise tax by the central government and when the shoes are transported to another state, there are the entry tax and VAT (value-added tax). With the implementation of GST, all the taxes will be collapsed into one rate, taking away the effects of multiple taxes."

The changes will help facilitate more ease in tax administration, change the competition landscape, and provide a more level playing field for both big and small players from Singapore, Mr Tay added.

According to World Bank projections, India will have the world's fastest growing economy by 2018. In 2014, Singapore invested S$19.4 billion in India, more than seven times the $2.6 billion in 2006. Singapore companies in India welcome this significant change in India's tax structure. CEO of Ascendas Property Fund Trustee Sanjeev Dasgupta said Ascendas-Singbridge is planning ahead and is, therefore, prepared for the GST implementation.

In addition to its IT Park business, the company is looking at diversifying into logistics.

"While we do not expect major increase in the costs of doing business in the IT sector, the logistics sector will benefit through overall reduction in incidence of taxation and optimisation of logistics and distribution costs," he said.

Mr Dasgupta added that GST implementation will be a key demand driver for Grade A warehousing space from fast moving consumer goods companies, which are large users of logistics facilities in India.

"They are likely to move to larger warehouses adopting the hub and spoke model used in developed markets. This will drive a shift in warehousing development from small unorganised players to institutional players who have a competitive advantage in terms of capital and development expertise," he said.

For new developments in the Ascendas-Singbridge Special Economic Zone (SEZ) properties, GST exemption will be available on construction costs.

"For our customers in our SEZ buildings who export IT services, their lease rental will be exempt from GST and they will also enjoy GST exemptions on their export revenues. In our non-SEZ developments, GST may reduce construction costs as obtaining input tax credit should be easier," Mr Dasgupta said.

Executive director in the YCH CEO Office Margaret Toh said with the implementation of the GST, there will be the concept of one nation, one tax. "So input tax credit will be free to utilise from one state to another, or from product to service and vice versa, which is a benefit to business. As there will be one tax department, businesses will also benefit from spending less time in compliance and assessment procedures as compared to the current regime," said Ms Toh, who leads and drives regional business performance, overseeing YCH India, YCH Malaysia, YCH Indonesia and YCH Thailand.

YCH is a leading integrated end-to-end supply chain partner to some of the world's largest multinational corporations and aspiring growth companies. It has been in operations in India since end-2006.

"As indirect taxes of all the states and central will be merged in GST, which is completely system-driven, businesses may have some short term challenges such as systems set-up and processes to cope in the first year of implementation. But in the long run, businesses will benefit with the cost reduction and an overall single assessment process," Ms Toh said.

To prepare for the GST rollout, YCH India had several training sessions by external agencies and it also conducted some work in systems set-up and processes to handle the requirements of the GST act and rules. "We even conducted discussions with our customers and suppliers for some changes in format and billing process as per GST requirements," she added. Ms Toh said in the long run, there will be positive impact in the logistics industry "as there will be hubs consolidation, which will benefit YCH as a strong player which runs large distribution centres across the Asia-Pacific".