Indirect tax compliance is a vital part of a business’ success. This type of tax applies to the price of goods and services before they reach the customer. The tax amount is usually part of the market price of the goods and services. By understanding how to stay compliant with indirect tax, you can reduce your expenses and maximize your profits.
Direct taxation and indirect tax laws vary by state, and businesses with a multistate operation must be aware of the requirements and the impact on their bottom line. For example, changing laws can make businesses liable to report sales in states where they have no physical presence. But proactive strategies can help businesses avoid penalties, determine the amount of sales tax to charge, and manage varying nexus and reporting requirements.
While indirect tax compliance requires minimal resources, it consumes valuable time. Indirect tax compliance consumes time that could be used to perform more value-added activities, such as audit defense, taxability research, general ledger account reconciliation, and sales tax calculation software issues. Furthermore, it involves manually preparing and validating multiple data sources.
Indirect tax compliance is a growing challenge for many businesses. Companies must understand the complexities of different tax rules and rates, document all taxes and ensure that they are complying with all rules and regulations. The challenges are only increasing with globalization, as companies have to deal with global indirect tax responsibilities. These responsibilities include the value-added tax (VAT) across Europe, goods and services tax (GST), and harmonized sales tax taxes in the United States and Canada.
Indirect taxes apply to the goods and services purchased and supplied in a country. These taxes must be declared to the tax authorities. Ultimately, businesses must pay the taxes that they are liable for. Whether the tax is paid by a customer or paid by the company, it is important to be compliant.
Using automation in the indirect tax life cycle is one way to improve your company’s ability to understand and manage indirect tax footprint. Often, businesses are able to gain greater insight and efficiency through automation. Indirect tax software solutions that incorporate machine learning and artificial intelligence can also provide insight into your company’s indirect tax footprint.
To be successful in indirect tax compliance, in-house tax teams must build the right automation system for their needs. This requires dedicated teams and continuous maintenance. For example, a company with 50 countries would need 50 different tax codes. If any country changes its VAT rate, the company would become non-compliant. Moreover, they would need to edit and test each code individually, which would divert resources from their core aims.
Indirect taxes include excise tax, value-added tax, service tax, custom duty, and sales tax. They are included in the prices of goods and services that consumers pay. They cannot be avoided, and they are an important source of revenue for governments. The contribution of indirect taxes to GDP is higher than that of direct taxes.