Changes in regulations like the International Financial Reporting Standards (IFRS), Goods and Services Tax (GST), Direct Taxes Code and the new Companies Act are likely to spur business for consulting and audit firms.
Some business is already trickling in, which could turn into a deluge once a date for GST’s introduction is notified. The Centre is planning to introduce the GST by October this year, which will replace both state and central sales taxes, as well as Value-Added Tax (VAT) and service tax. As for IFRS, companies need to adopt the standards by April 2011.
KPMG Chief Operating Officer Akhil Bansal said the four changes are the largest phenomena of change he has seen in his life. “Èach of them is a really, really big change,” he said. Nobody wants to hazard a guess, but GST and IFRS can each bring in a 20-30 per cent business upside for consulting and audit firms.
Consider the opportunity in IFRS. There are over 7,000 listed companies in the country, plus banks, mutual funds, insurance companies and non-government organisations (that’s more than all the companies in Europe) who need to adopt IFRS by 2011. Even if audit firms charge Rs 10 lakh a company, they are staring at big numbers.
The larger audit firms, who have the experience of doing convergence work in markets like Europe, could walk away with 60 per cent of the work. Mazars India Partner Bharat Dhawan said only firms that have the expertise in the process of convergence to IFRS will be able to provide an effective solution to Indian companies.
“We have been preparing for IFRS for two years… We picked up our experiences in Europe, started sending people to Europe, doing concept paper for clients, training people, putting teams together. Once it hits the ground, the number of CAs you will need to do the convergence to IFRS is mind-boggling,” said KPMG’s Bansal.
The GST rollout could create a similar opportunity for consulting firms. BMR Advisors Managing Partner Bobby Parikh said GST would be a big change, which would require companies to review their operations, sourcing, how they distribute their goods and the price at which they sell.
“Everything you purchase will be available as a credit; the accounting systems will have to be reconfigured to capture that data,” said Parikh. So, there could be an opportunity for enterprise resource planning firms like SAP and Oracle, who design software.
In India, operating structures of companies evolved as tax laws were in a certain way. There is multiplicity of taxes and the duty incidence is high. After including excise and VAT, the tax incidence on many goods was almost 30 per cent till excise duties were cut to lift the economy. Today, the tax incidence is around 20 per cent.
Companies had designed their distribution network to optimise taxes. They manufactured at different locations, had depots in different states and did stock transfer to do local sales. “All these could vanish when the new regime kicks in. What GST will do is effectively integrate the markets,” PwC Executive Director R Muralidharan said.
Another consultant points out that, no matter where you produce, “the duties you pay on inputs to manufacture a product will be creditable on the tax payable on it”.
Take a car, for instance. Assume a company pays a duty of Rs 4 on the inputs used to make the car. This duty will be creditable on the GST (say, Rs 9) payable on the car. So, the company will deduct the tax paid on inputs and deposit only Rs 5 as tax. “Today, not all of Rs 5 is available to a company as credit,” said Parikh.
Companies will have to hire consultants to assess the impact of GST and review their supply chain. “Right now, there’s a lull,” said Muralidharan.
But once the date is notified, companies may rush in to understand the implications (GST was to kick in from April this year. But the earliest it can come in now is by October, 2010, or April, 2011). If it comes by October, a lot of companies may engage consultants by April. The Direct Taxes Code and the new Companies Act will bring in some business too. But it’s IFRS and GST where the big opportunities lie.
Many consulting companies may target big companies like Hindustan Unilever for GST work, but the real opportunities may lie with the mid-size companies who do not have strong technical expertise and may need hand-holding to analyse the impact.
A company like HUL has deep capabilities (it has been dealing with sales tax and customs for decades) and can manage things on its own and may only need to just reconfigure its accounting systems. If it’s a confusing legislation, consultants will have more work.
