Sukhchain Singh stops his truck, loaded with Lovable Lingerie Ltd. (LLL) camisoles and Revlon Inc. (REV) makeup, at a checkpoint on the Punjab state border in northern India. He slumps in his seat, resigned to a long, long wait.
“It often takes three or more hours to get permits and tax clearances for my cargo,” said Singh, eyeing a line of 30 trucks ahead. Such delays on many of India’s 28 state borders as guards enforce local levies from sales taxes to entry fees stoke freight transport costs. McKinsey & Co. puts them at 13 percent of gross domestic product versus 9.5 percent in the U.S., where there are no such tariffs.
The government’s solution: a uniform goods and services tax applied across India to subsume most state charges, reducing the need for border checks. The overhaul, which the nation’s Finance Commission projects may yield a $517 billion economic boost, is more than two years behind schedule as gridlock in policy making contributes to the weakest Indian growth in nine years.
“It’s the single biggest reform,” billionaire Adi Godrej, chairman of Mumbai-based Godrej Group, which includes retail and industrial units, said in an interview. “Implementation of the goods and services tax will add 1.5 to 2 percentage points to the GDP growth rate. I’m afraid some politicians and bureaucrats don’t fully understand the tremendous economic benefits. We take too much time in implementing good decisions in India.”
The revamp seeks to swap about 15 state and federal levies for one at the time of sale. Preventing a product being taxed more than once would spur commerce, while casting a wider net over services would help buoy revenue, according to the Finance Commission.
The commission, a panel appointed by the Indian president, estimated the step will lead to an economic gain of as much as 28.8 trillion rupees ($517 billion) in a 2009 report.
A simpler tax structure that frees up goods movement would help contain inflation as well as boost stocks, said Jagannadham Thunuguntla, a strategist at SMC Global Securities Ltd. in New Delhi. Companies such as Allcargo Logistics Ltd. (AGLL) in Mumbai, Chennai-based Sical Logistics Ltd. (SICL) and Transport Corp. of India Ltd. in Gurgaon, Haryana, are among those that may gain, he said.
Manufacturing will benefit as costs fall since the tax rate on goods will drop to 20 percent, less than an array of levies amounting to as much as 28 percent now, said Mumbai-based Sachin Menon, head of indirect tax at KPMG in India. Services, by contrast, will be more expensive with a 16 percent tax, he said.
Services make up about 57 percent of Indian GDP and manufacturing 16 percent, Finance Ministry data shows. That adds pressure for steps to quicken factory growth and create jobs in a nation where most people live on less than $2 per day.
The expansion in the $1.8 trillion economy in the 12 months ending March 2013 will probably hold at the 6.5 percent pace of the previous year, which was the slowest since 2002-2003, according to the Reserve Bank of India.
Inflation averaging more than 7 percent in 2012 and a faltering global recovery have hurt growth. Graft allegations and discord in the ruling Congress party-led coalition have paralyzed policy making, blocking Prime Minister Manmohan Singh’s efforts to spur investment. The rupee has plunged about 17 percent against the dollar in the past 12 months
“The absence of a common market is making India less attractive as an investment destination,” said Sajjid Chinoy, an economist at JPMorgan Chase & Co. in Mumbai who used to work at the International Monetary Fund. “GST will make India a more competitive production base because you get rid of all the cross-border distortions.”
Truck delays average five to seven hours at state lines as officials enforce levies including a 2 percent tax on sales of goods from one state to another, said P.C. Sharma, chief executive officer of Transport Corp. of India’s express division.
That implies a speed of 12.7 kilometers an hour in a nation where about 65 percent of freight moves on roads. That’s about one-third of the top running speed of Olympic gold-medal sprinter Usain Bolt.
Intercity Indian trucks with two to three people in the cab average 80,000 kilometers a year, versus 400,000 kilometers in the U.S. for two-driver teams, because of jams and long delays at border posts, the World Bank estimates. Checkpoint stoppages may cost up to 23 billion rupees annually in lost trucking hours, according to the lender.
There are 177 interstate checkpoints in India, the Ministry of Road Transport & Highways said in February.
Singh’s government set April 2010 as the target for introduction of the goods and services levy. A failure to push through necessary constitutional changes in parliament or strike deals with states over compensation for any revenue losses has stalled the overhaul.
The opposition Bharatiya Janata Party forced the legislature to adjourn for a sixth day yesterday as it called for Singh to quit. It was responding to an Aug. 17 report by the chief auditor that claimed the government may have lost 1.86 trillion rupees by giving away coal blocks rather than auctioning them.
Finance Minister Palaniappan Chidambaram said last week he still hopes the bill for the goods and services tax will be passed before the end of the fiscal year that began April 1.
Others are less optimistic, seeing the possibility of procrastination beyond the general election due in 2014.
“You have a chance that sometime in October 2014, it can be implemented,” said Satya Poddar, a tax partner with Ernst & Young in Gurgaon, adding that the interstate tariffs are unique to India. “It’s a question of when, as opposed to if. All political parties realize the benefits of GST.”
That’s little consolation for trucker Sukhchain Singh as he mulls the border delays slowing deliveries of Mumbai-based Lovable Lingerie’s slips and New York-based Revlon’s lipstick.
“My first name means happy and content,” he said. “But I’m neither because of checkpoints.”
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