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