As India overhauls complex web of taxes

When trader Vivek Mehra buys artwork from the remote corners of India, he braces himself for a world of pain as he navigates the country's notoriously complex tax system.

But Mehra, who makes and sells furniture, is among throngs of business owners hopeful Prime Minister Narendra Modi's moves this week for a new, single national sales tax will make life much easier.

At the moment, Mehra has to pay different rates of sales tax in different states, a policy that means endless hold-ups when crossing interstate borders.

"You can be stranded behind 300 trucks at the border and even one single piece of paper missing can mean your load is confiscated," he told AFP in his New Delhi workshop.

Lawmakers have voted in favour of scrapping India's jumble of federal and state taxes and introducing a single goods-and-services tax (GST), creating a common market for the first time.

The government said the move, hailed as India's most significant economic reform in decades, would reduce double taxation, cut red tape and make the system more efficient. 

Experts said the tax could eventually help boost India's already strong economic growth by up to two percentage points.

"Consumption will go up, production will go up, investments will go up, investment into production will go up, so this is a great development," said Adi Godrej, chairman of consumer goods giant the Godrej Group.

"To my mind it is the biggest economic reform after the liberalisation of 1991," he said, referring to historic moves to open up India to international trade.

- 'Stiff targets' -

Modi has battled fiercely to introduce the tax after facing criticism for being too slow to introduce much-needed reforms after storming to power in 2014.

The main opposition Congress party, which first proposed a GST a decade ago, blocked the current one in parliament for 12 months before finally agreeing to an amended version.

But experts say the changes needed to win political support may have blunted the overall boost to the economy.

States will still be allowed, for example, to separately tax alcohol, petrol and other products that are likely to be excluded from the GST.

The government also faces a race against time to introduce the tax by its deadline of next April, when the new financial year starts. Half of India's states have to now ratify the move in their parliaments before it can be enshrined in law.
Thousands of tax officials must also be trained in the new regime, government IT systems overhauled and companies themselves briefed on complying with the changes.

"It is always good to set stiff targets and try meet them, rather than have no targets at all," Finance Minister Arun Jaitley said of the deadline, which many experts believe is optimistic. 

The main rate of the GST must also still be thrashed out by a council of state and central officials. 

Congress says it wants the rate capped at 18 percent of any purchase of goods or service to avoid what it calls "creeping taxation".

- 'Just one tax' -

States with lots of manufacturers may battle to push the rate higher.

They stand to lose revenues because the money collected would now go to the state where the product is consumed, although New Delhi has pledged to reimburse them for the first five years.

"We need to wait for details and tax rates to come out before speculating about the GST's effectiveness," warned Sujan Hajra, chief economist at Anand Rathi Securities.

But Prakash Tulsiani, chief operating officer with Allcargo Logistics based in Mumbai, is confident the move means increased productivity, with less paperwork and faster delivery of goods.

"Now, we don't have to worry about multi-level taxation levied by different states," said Tulsiani.

About 150 countries worldwide have some form of GST or VAT (Value Added Tax), according to the Organisation for Economic Cooperation and Development.

Mehra, who employs around 200 artisans and others at his workshops and showrooms in Delhi and neighbouring Rajasthan state, hopes the changes will also mean fewer headaches.

"Hopefully there's only one department that we now have to answer to, we don't have to go to excise, we don't have to go to VAT and various other departments. We just pay one tax and that's it," he said. 

"That's what we hope is going to happen. But let's see what the fine print says."

Source: AFP