According to RSM’s analysis, GST has many similarities with the EU VAT system and will harmonise and simplify a fragmented system of around 10 central and state level taxes into one central system of indirect taxation. It also introduces digital tax returns for businesses for the first time.

However the firm cautions that application is complex, and predicts the first few months will be challenging. For example, while the main GST registration threshold will be INR2m (£23,750), states in the north-east will have a registration threshold of INR1m adding complexity. In addition, there will be five rates of tax ranging from zero to 28%, with intricate rules for many types of supply.

In addition, RSM warns that compliance requirements are likely to be onerous, with businesses required to issue specific documents in relation to the different types of supply or transaction concerned. It cautions that many businesses will find difficulty in achieving good levels of compliance, especially at the outset, which could see some facing penalties highlighting additional financial risks. 

Its briefing note concludes: ‘However despite implementation concerns, the replacement of multiple taxes is a welcome modernisation and the introduction of GST should bring significant economic benefits to India including a predicted 2% annual uplift in output.

‘Businesses trading with India, principally those with a presence in the country will need to ensure that they act now to ascertain their obligations and consider the practical measures on their business for these changes. Practically, this would include pricing and renegotiation of agreements, changes in reporting and supporting IT infrastructure, optimisation of supply chains, compliances and consideration of impact on cash flows and business processes.’

While agreeing that most businesses anticipate a positive impact on GDP from the introduction of GST and a more competitive economy through the creation of a single national market, analysis from EY also identifies a number of key challenges.

EY says the short implementation period has required businesses to prepare quickly, and demands that they continue to review and monitor their compliance position, while more sectors and businesses are likely to be brought into the tax compliance net. It also warns that GST will apply tax to inter-state activity, and will introduce multiple rates and new concepts.

Gijsbert Bulk, EY global indirect tax leader, said: ‘The introduction of GST in India is an historic achievement and aspires toward greater cross-border collaboration and cooperation. As businesses make this transition, they should be mindful that new rules always create greater risk of non-compliance, and they should monitor the impact on pricing and margin.

‘Given the challenges faced by businesses in adapting to this new landscape, we believe they would benefit from greater leniency in compliance requirements and related sanctions during the transitional period.'

Report by Pat Sweet