“Once a new technology rolls over you, if you’re not
part of the steamroller, you’re part of the road.”
Steward Brand
INTRODUCTION
Taxes are as old as civilization, so the ‘Value Added Tax’
(VAT), hardly 63 years old, may seem to be relatively
young in the history of tax. For India, that embraced this development in taxation over the last half-century. Limited
to fewer than 10 countries in the late 1960s, VAT/GST is a
‘Consumption Tax’ of choice of some 170 countries today.
Presently, all member countries of the Organization of
Economic Cooperation and Development (OECD),
except United States, have VAT systems in place [See
Graph 1]. Significantly, UAE and Saudi Arabia have also fundamental ‘Indirect Tax Reform’ in the form of ‘Goods
and Services Tax’ (GST) only in July, 2017, it may even
resemble a ‘New-born Baby’ that has just arrived in the
world from the mother’s womb!
[The words ‘VAT’ and ‘GST’ are used synonymously
in this article.]
GLOBAL SPREAD OF VAT
The spread of VAT has been the most important implemented VAT from January 1, 2018, whereas, other
Gulf Cooperation Council (GCC) countries – Kuwait,
Qatar, Bahrain and Oman – are expected to levy VAT
from 2019.
In terms of revenue, VAT is now the largest source of
taxes on general consumption in OECD countries on
average. Revenues from VAT as a percentage of GDP
increased from 6.8% in 2012 to 7.0% in 2014 on average; and from 20.05% in 2012 to 20.07% in 2014 as a share of
total taxation. [See Graph 2].
INDIA’S ‘MIDNIGHT TRYST’ WITH GST
Finally, GST was launched from the Central Hall of Parliament
with much gaiety and fanfare in the midnight of June 30, 2017,
marking an opening of a new chapter in the indirect tax history
of the country. What was equally significant was the fact that
with the introduction of GST, a new era of ‘Cooperative
Federalism’ was perceived to have begun!
INDIAN GST – FAULT LINES BECOME VISIBLE
However, the fault lines inherent in the design and structure
of the country’s GST system soon became visible!
Exclusion of several key commodities from GST and
resultant distortion of credit chain, significant restrictions
placed on the entitlement of Input Tax Credit (ITC)
resulting into cascading effect of tax, multiple rates,
long list of exemptions, low threshold and ill-conceived
business processes are but only a few ills that plagued
the Indian GST design from its inception. The biggest
‘let-down’ turned out to be the GSTN Portal! Multiple and
complicated returns, cumbersome Return-filing process,
ill-conceived statutory requirements reflecting revenueoriented,
rigid and ‘i-don’t-trust-you’ attitude coupled with
hopelessly ill-prepared GSTN portal have ensured that
the GST implementation and compliance by ‘more-thanwilling’
taxpayers are anything but smooth! The poorly
drafted, hastily implemented and badly administered GST
laws have only added to the woes of the taxpayers. The
situation has reached such an impasse that the whole system appears to be running on extensions, promises
and assurances!
INDIAN GST DESIGN –WHAT LIES AHEAD?
GST has a potential and the intrinsic characteristics to be ‘a
blessing’ – instead of ‘a curse’ as being perceived by many
today – provided it is designed and structured intelligently
and diligently. The system should be supported by subsystems
such as minimalist number of rates; moderate tax
rate; minimum exemption; high exemption threshold; neatly
defined key expressions; minimal and clear classification;
simple valuation provisions; seamless credit chain; clean
and clutter-free business processes; robust, insightful and
forward-looking ‘dispute redressal machinery’ and many
more. Anything contrary to this would be a humungous
curse for the economy.
TO SUM UP…….
Demonetisation and GST have several common attributes.
The most striking one is the discourse of short-term pain
and long-term gain. However, the latter can be enjoyed
only if one does not succumb to the former. The objective
to plug the informal economy – mainly prevalent in MSME
Sector – into formal set-up may have benefits. But the cost
can outweigh the benefits if done forcefully through radical
reforms. Moreover, the decision to grow competitive should
be a matter of choice and not compulsion. Presently,
lower exemption threshold coupled with cumbersome
compliance can prove to be counter-productive and push
small businesses towards new ways of tax evasion, thereby
breeding corruption.
A mega reform like GST is nothing short of a paradigm
shift. Such reforms often gives rise to two broad categories
of inconveniences, foreseen and unforeseen. Presently,
most of the inconveniences were of ‘foreseen’ category
and could have been avoided. Nevertheless, now is not
the time to cry over ‘what it could have been?’ but, to
concentrate on ‘what it should be’.
It is, indeed, heartening to note that the benevolent and
responsive GST Council has pro-actively undertaken
mid-course corrections. Going by the decisions taken by
the Council in last three meetings, the Council appears
to be determined to ease the woes, particularly that of
compliance load, of the taxpayers and this itself should
‘smoothen the ruffled feathers’ of the taxpayers, at least,
for the time being!
CHANGING GLOBAL TAX HORIZON
Even while the GST Council faces the challenges of
finding ‘elusive design’ that may fit the bill and the right
matrix of the business processes and of building a solid
GST structure, the global tax landscape is going through a
period of fundamental change. The policy-makers and the
tax experts across the world are re-thinking how taxes are
or ought to be levied. Changes have been triggered by the
unimaginable advancement and rapid spread of technology,
digitalisation, new supply chains and an increased scrutiny
of multinational tax practices! These changes will certainly
have destabilising – if not, devastating – impact on the
taxation across the world including India and will inevitably
bring forth its own set of formidable challenges. Obviously,
these changes and challenges can be ignored by one
only at one’s own peril!
In the ensuing paragraphs, these technology-driven
changes and their likely impact on VAT system are briefly
discussed. But before that, it would be advantageous to
understand the meaning of ‘VAT’ and the core principles on
which the foundation of VAT rests.
VAT – MEANING AND ITS CORE PRINCIPLES
International Tax Dialogue, 2005 defines ‘VAT’ as ‘a broad
based tax levied at multiple stages of production (and
distribution) with – crucially – taxes on inputs credited
against taxes on output. That is, while sellers are required
to charge the tax on all their sales, they can also claim
a credit for taxes that they have been charged on their
inputs. The advantage is that revenue is secured by being
collected throughout the process of production (unlike a
retail sales tax) but without distorting production decisions
(as turnover tax does)’.
In November, 2015, OECD published its ‘International
VAT/GST Guidelines’ (Guidelines). The Guidelines are the culmination of nearly two decades of efforts to
provide internationally accepted standard for consumption
taxation of cross-border trade, particularly in services and
intangibles. The Guidelines aim at the uncertainty and risks
of double taxation and unintended non-taxation that result
from the inconsistencies in the application of VAT in crossborder
context.
The overarching purpose of a VAT is to impose a broadbased
tax on consumption, which is understood to
mean final consumption by households. A necessary
consequence of this fundamental proposition is that the
burden of the VAT should not rest on businesses.
The central design feature of a VAT, and the feature from
which it derives its name, is that tax is collected through
a staged process. This central design feature of the VAT,
coupled with the fundamental principle that the burden of the
tax should not rest on businesses, requires a mechanism
for relieving businesses of the burden of the VAT they pay
when they acquire goods, services or intangibles. There
are two principal approaches to implementing the staged
collection process of VAT, one is invoice-credit method
(which is a ‘transaction-based method’) and other is
subtraction method (which is ‘entity based method’).
Almost all VAT jurisdictions (including India) of the world
have adopted the invoice-credit method.
This basic design of the VAT with tax imposed at every
stage of the economic process, but with a credit for taxes on
purchases by all but the final consumer, gives the VAT “it’s
essential character in domestic trade as an economically
neutral tax”. As the introductory chapter to the Guidelines
explains:
“The full right to deduct input tax through the supply chain,
except by the final consumer, ensures the neutrality of the
tax, whatever the nature of the product, the structure of
the distribution chain, and the means used for its delivery
(e.g. retail stores, physical delivery, internet downloads).
As a result of the staged payment system, VAT thereby
“flows through the businesses” to tax supplies made to final
consumers”.
It is, thus, evident that the two core principles on which the
VAT system is based are:
◆ Neutrality principle
This is the core principle of VAT design. The Guidelines set
forth the following three specific precepts with respect to
‘basic neutrality principles’ of VAT:
• The burden of VAT themselves should not lie on taxable businesses except where explicitly provided for in
legislation;
• Businesses in similar situations carrying out similar
transactions should be subject to similar level of taxation;
• VAT rules should be framed in such a way that they are
not the primary influence on business decisions.
◆ Destination principle
This principle seeks to achieve neutrality in cross-border
trade.
The Guidelines provides: “For consumption tax purposes,
internationally traded services and intangibles should
be taxed according to the rules of the jurisdiction of
consumption.”
Keeping the above core principles of VAT system in mind,
let us now advert to certain key challenges facing the tax
system.
I. TAX CHALLENGES OF THE DIGITAL
ECONOMY
On March 16, 2018, OECD released ‘Tax Challenges
arising from Digitalisation – Interim Report 2018’. The
Interim Report is a follow-up to the work delivered by the
OECD in October 2015 under Action 1 of the Base Erosion
and Profit Shifting (BEPS) Project, which was focused on
addressing the tax challenges of the digital economy.
The Report states that ‘Digitalisation is transforming many
aspects of our everyday lives, as well as at the macro-level
in terms of the way our economy and society is organized
and functions. The breadth and speed of change have
been often remarked upon, and this is also true when one
considers the implications of this digital transformation on
tax matters’. The Report acknowledges the far-reaching
implications of digitalisation and its disruptive effects,
beyond the international tax rules, on other elements of
the modern tax system, bringing forth opportunities and
challenges. From the design of the tax system through
to tax administration, relevant developments include
the rise of business models facilitating the growth of the
‘gig’ and ‘sharing’ economies as well as an increase in
other peer-to-peer (P2P) transactions, the development
of technologies such as block chain and growing data
collection and matching capacities.
Chapter 7 of the Report titled “Special feature – Beyond
the International Tax Rules” explores some of these
changes including Online platforms and their impact on
the formal and informal economy. There is no denying
the fact that global e-commerce is becoming increasingly
important. The rapid growth of multi-sided online platforms is attributed to digitilisation. The estimates suggests B2C
sales of US$ 2 trillion annually and is registering an annual
growth of 10 to 15 per cent. Based on an average VAT rate
of 15%, this represents US$ 200 billion in tax revenues!
(It may be noted that US operates a sales tax and has
not embraced VAT as yet). Currently, online shoppers are
tagged at 1.6 billion and are estimated to rise to 2.2 billion
in 2022. E-Commerce admittedly creates challenges for
administrations (VAT and Customs) in terms of collection
since non-taxation creates an unlevel playing field.
The Interim Report notes that the opportunities presented
by multi-sided platforms as regards taxation are two-fold:
i. Facilitate integration into the formal economy;
ii. Drive growth and increase revenues
The Report then identifies the following issues that must
be addressed in order to realise the benefits as well as to
address some of the challenges arising from the operation
of online platforms:
• Understanding the tax implications of the changing
nature of work
• Fostering innovation and ensuring equivalent tax
treatment with similar, existing activity
• Improving the effective taxation of activities facilitated
by online platforms
In sum, the digital economy has become increasingly
entwined with our physical world. The Indian digital
economy is expected to be worth about US$ 35 billion
and it is growing at a pace of 24-25 per cent a year. Given
the high disruption that digital economy has brought
about and its blistering growth rate, a few key questions
arise – how should the digital ecosystem be taxed? How
can governments earn revenue from services that span
borders, as some of the world’s most valuable enterprises
like Google, Facebook and Amazon spread their reach in
emerging markets like India? What share of their revenue
can the Indian Government look at taxing? Is Indian GST
system geared up to address the challenges and seize the
opportunities presented by digitisation?
II. BLOCKCHAIN TECHNOLOGY AND ITS
IMPACT ON THE TAXWORLD
In early 2016, construction workers in London unearthed
hundreds of Roman writing tablets, including some of the
earliest known examples of receipts and IOUs. The find
reminded all that, essentially, the way in which we record
the transactions has barely changed in 2000 years. But will
we say the same five or ten years from now?
‘Blockchain’ – a relatively obscure technology until only a few years ago – is about to make the step from the theoretical to
practical. When it does, it will fundamentally change the way
businesses, people and governments operate.
‘Blockchain’, to put it simply, is a ‘secure distributed
ledger that simultaneously records transactions on a
large number of computers in a network’. In this type
of secure, shared database, participants have their own
copies of the stored data. Strong cryptography ensures
that transactions can be initiated only by certified parties,
that changes are validated by participants collectively and
that the outputs of the system are immediate, accurate and
irrevocable.
BLOCKCHAIN AND INDIRECT TAX
Indirect taxes like VAT are ‘transaction-based taxes’ and
often follow chains of transactions and their tax liabilities.
Obligations are often “triggered” by key events that need
to be documented and recorded securely. These events
include the performance of a service or the delivery of
goods, the conclusion of a contract, the manufacture of
a product and by an act of importing or exporting goods
and services.
However, by and large, the indirect tax systems have
their foundations in physical transactions and trade. The
rise of the sharing economy, digital business and new
business models have caused many people to think about
the current tax systems. Blockchain has emerged at a
time when many in the tax world are speculating about
the efficacy and relevance of the current tax system in
the modern, digital era. While the financial and business
world is naturally excited about Blockchain, ‘Tax’ is one
area where this technology could have a profound impact.
Blockchain’s core attributes, namely, Transparency,
Control, Security, Real-time information and ability to detect
fraud and error mean that it has significant potential for use
in tax regime. Naturally, the tax administrations around the
world – including Indian tax administration – have started
considering the adoption of the Blockchain technology.
Some of the likely near-term uses of Blockchain that could
have an impact on indirect taxes are:
a. Blockchain regimes
VAT and customs administrations could create blockchains
for the transmission of tax data and payments between
taxpayers and government portals. These blockchains
could involve taxpayers in a single jurisdiction or they could
cross multiple jurisdictions.
b. Real-time compliance and reporting
Tax administrations around the globe are already
demanding real-time information from businesses in order
to assess and support their VAT liabilities and deductions.
Blockchain could greatly increase the speed, accuracy and
ease of collecting this data, thereby improving the quality
of VAT compliance while reducing the cost of compliance.
c. Tax Invoices
Tax invoice is the most critical VAT document. In a
Blockchain-based regime, it is likely that for a VAT invoice
to be valid, it will require a digital fingerprint, derived through
the VAT blockchain consensus process.
The fingerprint would immediately confirm that the block
under scrutiny is permanently linked to the previous and
subsequent blocks. The entire history of the commercial
chain (forward and backward from this transaction) could
be followed and scrutinised by a tax official in an office, by
a robot or by a customs officer at a border.
d. Customs documentation
Customs declarations and export controls depend on
various detailed and accurate information, often provided
by third parties. The veracity and reliability of this
information is vital.
Blockchain can enable the customs officer to verify, with
complete accuracy, various information and also the origin
and nature of the goods at every stage of the chain.
As this technology would allow them to verify every aspect
of a shipment with certainty, they could maintain supply
chain security with fewer officers who could target their
inspections more accurately.
e. Supporting refunds, reliefs and rebates and
combatting fraud
The use of immediately verifiable information
could allow taxpayers to support claims for VAT
deductions (or ITC) and customs rebates and reliefs.
Blockchain technology could also be useful in tracking if
and when VAT has been paid and in doing so, reduce VAT
fraud. Blockchain could also help to drive behavioural
change because of the risks and consequences of
non-compliance which may even lead to ‘permanent
exclusion’ from the blockchain network. In these ways, it
is likely that blockchain could help reduce the ‘tax gap’ to
some extent.
f. Smart audits
Using blockchain technology, indirect tax administrations
could carry out independent risk analysis facilitated by
artificial intelligence.
To sum up, Blockchain technology has tremendous
potential, not only to transform business, but also the tax
regimes across the world. Blockchain has the potential to
streamline and accelerate business processes, to improve
cybersecurity and to reduce or eliminate the role of trusted
intermediaries in industry after industry. The technology
has already many real-world applications and many more
applications are likely to be adopted in future.
III. 3D PRINTING AND ITS IMPACT ON
TAXATION
In 3D printing, we once again have a new technology that
could upend supply chains, business models, customer
relationships – entrepreneurship itself. 3D printing takes
mass distribution and innovation to the next level, while
realigning the very geography of work and trade.
Any significant technology that emerges impacts different
industries at different times, places and levels of disruption.
It also raises tax, legal and policy implications that can trip
up corporate leaders and global policymakers alike as they
are in full stride toward the future.
3D printing – a process of making solid objects from the
instructions in a digital file – has the potential to be every
bit as revolutionary as the PC was in the 1980s or even as
the factory production line was in the early 20th century. It
is also creating unprecedented opportunities to customise
products and reduce manufacturing costs.
But 3D printing also presents a minefield of challenges for
tax authorities around the world. This is because almost
all of the taxable value for a business selling product to
be 3D printed is contained within its intellectual property
(IP) – namely, the digital file’s ownership and authorisation
of its use, rather than in its manufacture, transport and
point of sale.
a. Disrupting long-standing business models
3D printing brings particularly complex global tax challenges
because it threatens to bypass long-standing protocols
used to set taxes on the movement of goods and supply
of services. 3D printing will absolutely disrupt the existing
model of taxation of goods and services grounded in the
physical movement of things or the provision of services.
The question ‘where value is created’ lies at the centre of
any discussion about the taxation of goods and services.
While VAT applies at the point of consumption, in some
taxing jurisdictions of the world, taxes are levied on raw
materials or intermediate stages where value is created,
such as in a factory and on shipment or warehousing.
3D printing disrupts these assumptions by transferring
manufacturing from factories to printing devices located
nearer the consumer, potentially even in their homes.
b. Intellectual Property takes centre stage
If consumers have 3D printers at home, much of the
taxable value may migrate there, where the supply chain
ends, greatly reducing the potential for supply chain taxes.
IP, as a matter of fact, sets the stage for any discussion
of 3D printing and taxation. Any 3D printing tax strategy
needs to consider that IP ownership and authorisation
will account for much more of a product’s value. With the
anticipated shrinkage in manufacturing, customer support
and sales personnel that will accompany this process, tax
authorities’ focus on IP is expected to intensify.
c. Transfer pricing and geographical challenges
Another tax challenge is the effect of 3D printing on
transfer pricing within multinational companies. Every time
a company changes its supply chain, it needs to change
how it shares costs related to taxable functions. If a local
distributor begins printing replacement parts, it could be
considered a factory, so the related transfer pricing would
change. Under current tax laws, it is unclear how or by how
much.
As we enter a new world of 3D printing, there are few
comparables in the current world of manufacturing.
d. Beware of double taxation
As production costs fall, 3D printing could also affect the
percentage of a product’s value that resides in any given
manufacturing location. In a 3D printing world, the value of
a product becomes more intangible than tangible.
So when tax authorities in different geographical locations
ask where the base of product’s profit is located and who
gets the right to tax it, they could come up with very different
answers, setting the stage for double taxation.
e. Global jurisdictional challenges
Business will also face location-sensitive tax questions
related to globally distributed manufacturing via 3D printing including permanent establishment (PE), exit taxes and
“substantial contribution” provisos.
f. 3D printed products can confound customs
Companies and governments often find themselves
contesting the value of imports, as products are shipped
across borders and through customs controls. Such crossborder
calculations could become a whole new equation,
as the increasing placement of 3D printers in local markets
changes global trade flows. While the raw materials or
components used in 3D printers may still cross borders the
old-fashioned way, more of a product’s value will be defined
by the digital blue prints that invisibly traverse the globe.
3D printing could also change the cross-border tax equation
for the value of raw materials and components. If the value
of raw material declines in relation to parts or products, it
could in turn affect customs duties.
The governments will then be looking to replace lost tax
revenue, and pressure could mount for a product’s digital
blue print to become the taxable item.
To sum up, 3D printing, yet another ‘disruptive technology’
will surely turn the business world upside down and the tax
profile of a business inside out!
IV. ROBOTS AND TAXATION
What happens if a new technology causes men to lose their
jobs in a short period of time, or what if most companies
simply no longer need many human workers? These
gloomy prospects loom large because of the advancement
and wide-scale spread of ‘robotic technology’.
Last year, Bill Gates, the co-founder of Microsoft proposed a
tax on robots to fund government expenditure on cushioning
the potential dislocation of millions of workers by the
widespread introduction of robots, and to limit inequality.
However, the arguments ‘for’ and ‘against’ the ‘Robot Tax’
continue across the world and it is not intended to dwell
into the same here.
What one needs to clearly acknowledge is the fact that
we appear to be at a technological ‘tipping point’ in the
diffusion of robotic technology across commerce, industry,
professions and households. It could spread like wildfire.
This could unleash what the economist Joseph Schumpeter
apocalyptically described as a ‘gale of creative destruction’
and set into motion a ‘process of industrial mutation that
incessantly revolutionises the economic structure from
within, incessantly destroying the old one, incessantly
creating a new one’.
The pace of automation is accelerating. In 2015, global
expenditure on robotics rose to US$ 46 billion. Sales of
industrial robots are growing by around 13% a year,
meaning that the ‘birth rate’ of robots is practically doubling
every five years.
The widespread introduction of robots could substantially
reduce the government’s revenues, while simultaneously
creating an increased demand for its support for displaced
workers until they find alternative employment. The heated
debate on ‘whether to tax robots or not’ revolves around
this central issue. However, even while the issue is being
debated, it is imperative that as a first step in taxing robots,
the legislation clearly defines ‘what a robot is?’.
There is currently no clear or agreed definition of what
constitutes a ‘robot’. The term generally conjures up mental
images of mechanical men or even humanoids like the
laconic Terminator, as portrayed by Arnold Schwarzenegger
in films. But, in practice, it would be challenging to identify
robots by sight. As David Poole has noted, ‘A robot is not a
unit equal to a human. Most are not physical robots, they’re
software robots. It’s no different, really, to a spreadsheet!’.
Given the range and sophistication of robots likely to come
into development, the definition needs to be ‘form neutral’;
i.e. it should include all autonomous robots, bots and similar
smart AI machines. Any proposed definition should be
tested from not just from legal perspectives, but also from
economic, technological and constitutional approaches.
The government, obviously, has a range of possible tax
policy options which include:
• Taxing robots
• Increasing the corporation tax rate
• Lumpsum taxes
• Taxing forms on the imputed notional income of their
robots
• Robot levy
• Imposing a ‘payroll tax’ on computers
• Disallowing relief on the acquisition of robotic
technology
• Increasing the cost of robots
• Increasing the rate of VAT payable on value added by
robots.
To conclude, the governments will be required to urgently
develop a legislative definition and ethical-legal framework
for robots. They should also take steps to introduce
corporate reporting requirements on their deployment, to
gather information that would facilitate remedial action like
the introduction of new taxes. At present, a palpable lack of
leadership in facing up to the substantial risks posed by the rapid diffusion of robotic technologies is on display across
the governments of the world.
VAT: EMERGING GLOBAL TRENDS
Even while the various ‘disruptive technologies’ looming
large on the horizon gear up to wreak havoc with the tax
regimes across the globe, some clear trends or changes
are clearly visible or emerging in the global developments
of indirect taxation. These emerging trends sweeping the
indirect tax landscape are likely to define and reshape the
traditional design and structure of VAT system.
Given that over 60 years have elapsed since first VAT,
serious deliberations are on amongst the tax experts and
policymakers on the need to “reform this revolutionary ‘tax
reform’”, and the contours of such reforms, keeping a close
watch on the emerging global trends.
The discussion in the ensuing paragraphs briefly outlines
these emerging global trends in the field of VAT. The
discussion is based on two independent papers published
by two of the Big 4 Accounting firms. [For reference, see
‘Acknowledgements’]
EMERGING GLOBAL TRENDS IN INDIRECT
TAX
Recently, the Global Indirect Tax Leader at EY published
an article titled ‘Indirect Tax: Five Global Trends’ in the
Bloomberg BNA Indirect Taxes Journal. The article outlines
five key trends sweeping the global indirect tax landscape
which are :
1. VAT and GST rates are stabilizing, but remain high
Following the banking crisis of 2008, VAT and GST rates
increased globally. The average rate of indirect taxes
peaked at 21.5% in the EU and 19% in the OECD. Of
late, these increases have slowed down and may even be
reversing.
2. Reduced VAT and GST rates and exemptions are
making a come back
Related to the post-2008 trend of increased rates, many
countries have broadened their VAT or GST base by
removing exemptions and restricting reduced rates.
However, this trend also seems to be slowing and may be
reversing.
3. The global reach of VAT and GST expands
Globally, VAT and GST have rapidly replaced previousgeneration
single-stage retail sales taxes. Very few
countries do not have a VAT or GST.
4. Digital Tax Measures proliferate
Tax administrations are grappling with the problem of how
to tax cross-border e-commerce and electronic services,
such as, digital downloads, because untaxed online sales
distort competition and reduce tax receipts. Governments
have responded to the growth of digital commerce by
adapting tax laws and using technology to collect tax and
monitor tax information.
5. Tax administrations embrace technology
As well as finding new ways to tax the digital economy, tax
administrations are applying digital technology to administer
indirect taxes more effectively, imposing requirements such
as the electronic submission of VAT or GST declarations,
mandating the use of e-invoicing, and introducing new
reporting standards and real time collection.
While the above trends are, indeed, clearly visible in the
VAT/GST systems around the world, a detailed paper titled
“VAT: A pathway to 2025” published in International Tax
Review in November 2017 by Indirect Tax Team of KPMG
China, seeks to provide a different perspective and insight
in the emerging trends which are likely to sweep indirect
taxes beyond what one can already clearly see.
Starting with a quick snapshot of the ‘here and now’,
the article claims that there has never been a time when
there has been a greater certainty about the future global
direction of indirect taxes, at least over the next few years.
This claim is sought to be buttressed by three propositions:
First, VAT and GST rates throughout the world are at
an all-time high, and there is very little pressure being
brought to bear to either increase or decrease them.
Therefore, any global shift from ‘a rates perspective’ is
unlikely to be seismic, certainly as compared to what
took place globally in the period from 2008 to 2015.
Second, from 2016 through to 2018, we will have seen
several major economies throughout the world implement
a VAT or GST either for the first time or through the
expansion or rationalisation of their existing indirect tax
systems.
Third, in a global context, the period from 2015
through to 2019 (or thereabouts) will be remembered
for the proliferation of digital tax measures – whether
they are measures to tax the cross-border provision
of services that can occur digitally and without the
creation of a permanent establishment, or through a
new measure to tax the business-to-consumer (B2C)
importation of goods through e-commerce platforms.
However, the article asserts that while the OECD’s
recommendations were clearly designed with a view to
implementation in the EU, when applied to countries in
Asia Pacific region, they would be problematic, given
certain fundamental and structural weaknesses of the tax
systems of the countries of this region.
The article then poses a question – ‘Are there bigger
changes afoot with indirect taxes as we move into the
second quarter of the 21st century?’ With a clear intent
to prompt discussion and debate and add some colour
and controversy, while a pathway to 2025 is lighted, the
article posits three key indirect tax trends which are briefly
discussed below:
1. VAT and GST systems will more closely resemble
retail sales taxes
After adverting to the fundamental principles on which VAT
systems are intended to operate, the article states that
under this system, it is an implicit understanding that in a
typical supply chain when there is a flow of goods from say:
a. the manufacturer to the wholesaler;
b. the wholesaler to the retailer; and
c. then from the retailer to the end-consumer,
the only transaction that truly ‘matters’ from a VAT or
GST perspective in the sense that it raises the revenue to
which the tax is directed is transaction (c). The process of
collecting the tax and allowing input credits in transactions
(a) and (b) is merely an administrative mechanism to
reinforce the integrity of tax administration throughout the
wholesale supply chain.
However, from a tax adviser’s perspective, many of the
challenges which one confronts each day are focused on
the problems when the system breaks down in relation
to transactions (a) and (b) – that is, in ensuring the fiscal
neutrality of those transactions, leading to inefficiency,
non-competitiveness and tax cascading through the
supply chain.
The governments may therefore move from VAT system
into a tax system that more closely resembles a single
stage retail sales tax, mainly for three reasons:
First, technology will enable the settlement of tax obligations
between the supplier and the recipient instantaneously,
without the need for any real payment, crediting or refund.
Second, with a view to overcome the problems caused
by fraud – carousel or ‘missing trader’ fraud being the
most prominent -, the governments have resorted to the
reverse charge mechanism in place of VAT and more
recently, a number of EU countries have implemented,
or propose to implement ‘split payment’ methods for VAT
collection, whereby the recipient diverts the VAT included
in the purchase price directly to a bank account held for the
benefit of the tax authorities.
The fraud or evasion is often perpetrated in B2B transactions,
not B2C transactions. So, if there is a recognition already
that by taxing or crediting B2B transactions, the system is
prone to fraud or evasion, then, why do it?
Third, the concept of the supplier accounting for output tax
and recipient claiming input tax in B2B transactions will be
rendered superfluous. What one is left with is a retail sales
tax, that is, a single stage tax that applies to transactions
with end-consumers only.
The article, however, hastens to add that it is not necessarily
suggested that VAT or GST systems will be replaced as a
matter of form with retail sales taxes – rather, it is suggested
that VAT or GST systems will, as a matter of substance,
operate similarly to retail sales taxes.
2. Indirect Taxes to be managed almost exclusively
through technology
While growing automation of indirect tax determination
and administration process, both in government and
business, is clearly on display in last few years, the
technology developments in the broader economy itself will
mean that indirect taxes will be managed exclusively
through technology.
Indirect taxes are, by their very nature transaction-based
taxes. As more and more transactions occur in the digital
world, the logical outcome is that the indirect taxes
whose liabilities flow from these transactions will also be
managed and administered digitally. [See the discussion
on the ‘impact of technology on taxation’ in the preceding
paragraphs].
It is predicted that the role of the indirect tax adviser
will, therefore, be akin to the conductor of an orchestra
– not playing the instruments, but directing the
musicians and ensuring they keep time. The role of the
indirect tax adviser will be to maintain a watch over
the technology, testing the controls, and addressing
problems when they are detected.
The shift to automation will not simply be because the
technology will improve to help manage tax compliance,
but the tax itself will be adapted to fit the technology. The automation will be a function of two forces coming together
– technological advances to help manage tax compliance,
and developments in tax legislation to help the technology
apply in a more automated way.
3. The tax base for indirect taxes will be expanded in
ways not previously contemplated
It is stated that the principles which have, hitherto, defined
or shaped the indirect tax structure over the years may
not hold in 2025. The following developments which
have recently been enacted in China have been cited by
the article as leading a pathway for the rest of the world
to follow:
a. The pre-condition of being a ‘business’ or
‘entrepreneur’ for VAT/GST registration will no
longer apply
Virtually, all VAT systems (including GST system of India)
around the world have a pre-condition for registration and
VAT obligations that supplier is engaged in a business or
commercial or economic activity or is an entrepreneur.
China’s VAT system, by contrast, has no such precondition.
Instead, China’s VAT system imposes registration
and payment obligations on ‘units’ and then imposes
different obligations depending upon turnover thresholds.
The question that arises is whether a profit making
pursuit, coupled with a de minimis exclusion (where the
compliance costs would exceed the tax collected) is all
that is really needed as a precondition for imposing VAT
or GST liabilities. The private consumer/business divide
would then become redundant, in favour of a system that
more closely resembles what one already sees in China.
b. VAT/GST systems will even tax consumer-toconsumer
(C2C) transactions
Digital market places now facilitate trade between private
individuals. These developments in commerce are
commonly labelled as ‘sharing economy’, ‘crowd funding’,
‘crowd sourcing’, and ‘ride sharing’.
The central question is, why should the profit or gains
derived from these activities fall outside the VAT or GST
net? The bigger issue is that VAT or GST systems need to
be adapted to tax the value added, irrespective of whether
it is by a traditional business or a consumer sitting online.
In China, there is no real distinction drawn between
business and non-business activities.
c. Customs duty will need to find a new tax base
Customs duties are inherently narrow in their tax base in
that they typically apply only to goods, nor services. The
question is whether customs duty is at risk of a terminal
decline in its tax base unless changes are made. Is it
possible that customs duties will be expanded to services,
and if so, how would they be collected and administered?
d. VAT/GST will apply to financial services
The traditional reasons cited for not taxing financial services
under VAT or GST was the inability to apply the tax on a
transaction-by-transaction basis. However, that rationale
was conceived in an era when margins were the dominant
model rather than fee-based services.
Early steps to dismantle this were taken in places like
New Zealand (with GST imposed on insurance, through
a cash-based tax), in South Africa (with VAT on fee-based
services), in Australia (with the introduction of the reduced
ITC regime to remove the bias against outsourcing and
to achieve a broadly similar tax outcome to exemption),
in New Zealand again (with B2B zero rating) and more
recently, in China (with a broad-based VAT on financial
services with few exemptions).
The experiments in applying VAT to financial services are
shown to be largely working.
e. The tax base for VAT/GST will be expanded in other
areas too
Even the traditionally exempted areas such as healthcare
and education could potentially be taxed.
The challenge in this area is in balancing the desire for
good policy (which may support the removal of exemptions)
with the political realities of doing so (where taxing the
necessities of life may be seen as politically unpalatable in
some countries).
f. Taxes like a VAT/GST that are founded in
transactions or flows will continue to grow in
importance
The noticeable trend of a decline in the average global
corporate tax rate and increase in the average VAT/GST
rate may continue. In an era of unprecedented dislocation
and disruption to historical business models, what will
emerge is taxes that are imposed on ‘transactions’, or
on ‘cash flows’, and directed to the place where
‘consumption’ occurs.
While not predicting the demise of corporate taxes, it is
predicted that the corporate taxes will transmogrify until they more closely resemble the features of a VAT or GST.
FINAL THOUGHTS
After more than 60 years, VAT may now be at a turning
point in its life. At this juncture, the rapidly changing
climate poses serious challenges for the policymakers,
lawmakers, economists and the tax experts, including
the GST Council in India. The challenge lies in predicting
the intersection of two key developments – the first being
the profound changes we are witnessing to the economy
itself through technological developments that have been
labelled as the ‘fourth industrial revolution’; and the
second being an increasing reliance on indirect taxes
as they mature into a dominant form of taxation in the
21st century.
For Indian GST system, the frequent changes so far made
post-introduction of GST indicate that the government is
learning by its mistakes. In the words of Deng Xiaoping,
it is ‘crossing the river by feeling the stones’. But let
us not lose sight of the above formidable challenges that
lie over the taxation horizon even while we shape (or reshape)
our own GST design and structure! The GST
Council, led by the Union Finance Minister, seems to be
working only on the immediate challenges confronting the
system. However, the world is changing in the way and at
the speed which we cannot comprehend. What, therefore,
is required for the Council is to establish, even while fixing
the short-term challenges, a mechanism that starts working
on identifying the long-term challenges with the aim of
enabling the country’s tax systems to keep pace with the
seismic-level changes sweeping the taxation landscape.
“We must develop a comprehensive and globally
shared view of how technology is affecting our lives
and reshaping our economic, social, cultural, and
human environments. There has never been a time of
greater promise, or greater peril.”
Klaus Schwab, Founder and Executive Chairman,
World Economic Forum
ACKNOWLEDGEMENTS:
1. ASSOCHAM India and Deloitte (2015) – “Goods and
Services Tax (GST) in India – Taking stock and setting
expectations”
2. Banerjee Sudipto and Sonia Prasad – “Small
Businesses in the GST Regime”
3. Black Stefan – “Robots, technological change and
taxation” – Published on Tax Journal; September 14, 2017
4. Bulk Gijsbert, EY – “Indirect Tax: Five Global Trends”
– Published on International Tax Blog; April 13, 2017
5. Bulk Gijsbert and Barr Ros, EY (2017) – “How
blockchain could transform the world of indirect tax”
6. Charlet Alain and Owens Jaffrey – “An International
Perspective on VAT” – Tax Notes International, September
20, 2010; Vol.59, No.12
7. Charlet Alain and Buydens Stephane- “The OECD
International VAT/GST Guidelines: past and future
developments” – World Journal of VAT/GST Law; (2012)
Vol.1 Issue 2
8. EY (2017) – “In a world of 3D printing, how will you be
taxed?”
9. Flynn Channing, EY (2015) – “3D printing taxation –
Issues and impacts”
10. Hellerstein Walter, Professor Emeritus, University of
Georgia School of Law (October 2015) – “A Hitchhiker’s
Guide to the OECD’s International VAT/GST Guidelines”
11. Nicholson Kevin and Lynn Laetitia, PWC, UK – “How
blockchain technology could improve the tax system”
12. OECD – “Consumption Tax Trends (2016); VAT/GST
and Excise Rates, Trends and Administration Issues”
13. OECD/G20 Base Erosion and Profit Shifting Project –
“Tax Challenges Arising From Digitilisation – Interim Report
2018 (Inclusive Framework on BEPS)”
14. Owens Jeffrey, Piet Battiau, Alain Charlet – “VAT’s
next half century: Towards a single-rate system?”
15. O’Sullivan David, Consumption Taxes Unit, OECD
– “Global Developments in VAT/GST – Overview and
Outlook”
16. Poddar Satya and Ahmad Ehtisham – “GST Reforms
and Intergovernmental Considerations in India”.
17. Rao Govinda M. and Rao Kavita R., NIPFP (2005)
–“Trends and Issues in Tax Policy and Reform in India”
18. Rao Govinda M. – “GST Bill; First step, but with birth
defects” – Published in Financial Express, May 05, 2015
19. Shailendra Kumar, TIOL. “GST Roll-out with hiccups;
white paper on Future DESIGN warranted” – TIOL – COB
(WEB) – 561; July 06, 2017
20. Shailendra Kumar, TIOL- “Revamped GST calls
for change in Basic Design!” – TIOL-COB(WEB)- 583;
December 07, 2017
21. Shailendra Kumar, TIOL- “Rebooting of GST – A TIOL
word of caution for the Council” – TIOL-COB(WEB) -589;
January 18, 2018
22. Shailendra Kumar, TIOL – “Dear FM, Let’s not rush
into, India can ill-afford semi-cooked GST laws” – TIOLCOB(
WEB) -513; August 11, 2016
23. Steveni John and Smith Paul, PWC – “Blockchain –
will it revolutionise tax?” – July 01, 2016
24. Walker Jon – “Robot tax – A Summary of Arguments
“For” and “Against” – Last updated on October 14, 2017
25. Wolfers Lachlan, Shen Shirley, Wang John and
Jiang Aileen, KPMG China – “VAT: A pathway to 2025”
– Published on International Tax Review; November
28, 2017
