India Tackles Messy Web Of Sales Taxes

[aragorn]

Single levy would replace wildly varying regimes that snarl shipments in red tape

 

By

Raymond Zhong

March 19, 2015 7:31 p.m. ET

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GHAZIPUR, India—Every night, Ashok Kumar Gupta sits in the back of a white SUV at the border between the Indian states of Uttar Pradesh and Delhi, stopping trucks to check that taxes have been paid on their cargoes.

Prime Minister Narendra Modi is trying hard to make his job obsolete.

Across India, officials like Mr. Gupta delay shipments and snarl companies in red tape. A complicated web of sales taxes is to blame: The country’s states each have their own regime for taxing merchandise, the federal government taxes services and manufactured products, and a separate levy hits interstate sales.

One survey commissioned by India’s Road Ministry found that trucks spend nearly a quarter of their time on the road in border checks or other official inspections.

Now, the Modi government wants to replace the patchwork of taxes with a single, nationwide sales levy, a move economists call an epochal lowering of commercial barriers. A government-commissioned study estimated that a broad goods-and-services tax, or GST, would deliver an immediate boost to output of 1% to 2% and lasting gains in productivity.

ENLARGE

 

Mahesh Nandurkar, India strategist at brokerage CLSA, says the tax overhaul could be as consequential as China joining the World Trade Organization, in 2001. Others have likened it to the abolition of border controls within the European Union.

Mr. Modi’s government in December introduced a constitutional amendment to clear the way for the GST, pending approval by two-thirds of Parliament and half of India’s 29 states.

Finance Minister Arun Jaitley wants the new system up and running by April 2016, saying it will “play a transformative role in the way our economy functions.”

But states with large manufacturing bases have been wary: Receipts from the new tax would go to states where goods and services are consumed, not where they’re produced.

The Modi government in December agreed to compensate states for lost revenue during the levy’s first five years, and to let them continue taxing alcohol and petroleum separately. Some experts say these and other possible exemptions would curb the GST’s effectiveness, however. The more items that are excluded from the new levy, the higher the rate will need to be to generate the same amount of revenue. Economists expect India’s GST rate could end up between 18% and 24%, or higher.

“India is living in a fool’s paradise to say that it can levy a tax at retail of above 25%,” said Satya Poddar, a tax specialist at the consulting firm EY.

‘We need to do this game-changer’

—Kavita Rao, economist

But Kavita Rao, an economist at the National Institute of Public Finance and Policy in New Delhi, said: “We need to do this game-changer, get it out of the way. And then we can refine going forward.”

The economic distortions created by India’s present, fragmented tax system are vast.

Adi Godrej, chairman of the Godrej Group, an industrial and consumer-goods conglomerate, said his company maintains “unnecessary” warehouses around India to minimize the hit from the tax on interstate sales.

India’s GST, like the value-added taxes in the EU, China and elsewhere, would tax only an item’s final retail value. At present in India, products often end up double-taxed, as certain duties paid at one stage of the production process can’t be credited against others. Further complexities arise because goods and services are taxed separately—the former by states, the latter by the central government.

Abhishek Lodha, managing director of Mumbai-basedproperty developer Lodha Group, said his firm pays state sales taxes on construction materials, federal tax on building services and state duties on land. But, he said, these can’t be fully credited against the various sales taxes paid by home buyers. Compliance, he added, is “extremely painful.”

The GST’s simpler structure should reduce the need for today’s brute-force enforcement methods.

Every time Kartik Wahi’s startup, Claro Energy, buys and ships equipment from another part of India, he prepares a heap of documents and hopes for the best.

For Bihar state, where Claro builds solar-powered irrigation systems, a government website lists 97 different official forms, from A-I to VR-XIII, related to commercial taxes. Not until officials impounded a truck of Mr. Wahi’s around 18 months ago did he even know about one form, D-VIII, required for shipping inside Bihar’s borders. “We were just lucky” before then, he said. “The amount of effort which goes into procurement planning is crazy, because one can never, with a reasonable degree of assurance, predict when the goods will actually arrive.”

For now, officials like Mr. Gupta continue to prowl state borders, armed with flashlights and bamboo batons.

A long line of trucks, loaded with sacks of unmilled rice, had stopped on the shoulder of a highway one night recently. The drivers, Delhi-bound from Uttar Pradesh, wanted to avoid a team of state officials that had staked out the intersection up ahead.

“They can stop us on any grounds,” Dinesh Chand, one of the truckers, said wearily. “Once they leave, we’ll leave.”

 

source: http://www.wsj.com/articles/india-tackles-messy-web-of-sales-taxes-1426807881