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VAT’s More in ERP?

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DQI Bureau
New Update

When ERP was at its peak in the mid-90s, multinationals like SAP, Baan and

Oracle (all ERP product vendors) were faced with one of the toughest challenges–that

of localizing their products to suit the Indian tax system. Considered one of

the most complex tax structures in the world, India localization was a

big-ticket expense item and they went about making these investments to support

customers specifically in India. Just when they thought that localization was

complete and done with, the Government of India announced the introduction of

value-added tax (VAT) from April 1, 2003.

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Shekar

Y

"Vendors

need to go back to the drawing board to develop localized versions–to

make sure that they are compatible with today’s VAT laws"

In developed countries, VAT is common. Therefore, one assumes that the MNCs

will now be able to sell their internationally standardized versions in India

and it is the turn of Indian software companies to localize their products.

However, in reality, all vendors need to go back to the drawing board to develop

localized versions that are compatible with VAT laws.

Internationally, VAT is a single, all-encompassing and uniform tax that is

applicable to products and services. Hence, tax computation is simple. But the

proposed VAT structure in India is likely to make tax management more complex on

account of the following:

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n Tax is not uniform: There are

two tax levels that are applicable based on the state’s revenue generation

capability. For instance, if a car accessory is manufactured in state A, the VAT

levied could be 12.5%, whereas state B may levy only 10% VAT for the same

accessory.

n VAT is not the only tax: Some

states will continue to levy octroi and other cess in addition to VAT. This

means business must maintain further classification of tax collected, besides

what is prescribed by VAT.

n CST is not abolished: VAT is

supposed to eliminate interstate tax viz. CST. However, zero rating CST is going

to happen only in year 2005. From now till then, the CST rate is expected to

fall to near zero. This implies that business (read ERP systems) must maintain a

distinct record of goods bought/sold within and outside the state. This is

expected to increase the procedures (read paper work) and may impact the

response time to the customer.

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n VAT-exempt states: In the short

run, there are some states that will not be under the influence of VAT. Though

these are not too significant from a localization perspective, if some specific

business happens to fall in these states, then the existing system will have to

be maintained parallely.

In addition to the above, the cases that qualify for concession or

rebate/exemption of taxes on account of exports or import against exports, need

to be maintained separately as these are not covered under VAT as yet. Most

Indian companies that have implemented ERP/SCM (supply chain management)

solutions conduct business in multiple states. Thus, the impact on the

localization effort on account of VAT will be tremendous. Further, as VAT

evolves, it is expected to unfold more changes in software. And these might not

involve the mere resetting of parameters as may be the case for CST rates.

From the ERP product companies’ perspective, there’s another chunk of

development effort that now needs to be put in, and a new version is to be

released in a very short time. In the past, localization costs were to the tune

of a few million rupees, which the MNCs recovered from local business

activities. The magnitude of change due to VAT does not seem any lesser.

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Given the current market situation–which is not conducive for high

investments - recovering such costs will pose a stiff challenge to all ERP

product companies. Further, from a customer retaining strategy, there is no

choice available to them.

From the customers’ perspective, VAT has simply shifted the ROI (return on

investment) by a few periods and has also possibly unsettled the feeling of a

stabilized ERP system–a clear case of "Who Moved My Cheese". In

conclusion, both customers and vendors have a challenging task ahead–thanks

VAT!

Shekar

Y




The author is advisor to Backend Bangalore, a company incubated by the Indian
Institute of Information Technology, Bangalore.

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