C&B Notes

Red Tape Reduction in India

Quick update from one of last month’s Notes: the early returns are positive for India’s new streamlined goods and services tax, which aimed to reduce shipping time and to help businesses save on logistics costs.  Prime Minister Narendra Modi is making fundamental reforms that could help transform India’s economy.

Until recently, truck driver K Shaji often waited for hours at various checkpoints to pay state taxes on his cargo as he journeyed from India’s south to the country’s financial capital, Mumbai.  No more.  Such dragnets disappeared this month after the government overhauled its tax system, allowing Mr. Shaji and millions of truck drivers to motor past what used to delay their trips by hours.  The delays and tax fees — plus widespread bribes  — drove up costs and added to inefficiencies in the economy.

The result is an early success for a major economic initiative by Prime Minister Narendra Modi: replacing a tangle of state and federal levies with a new goods and services tax — a type of value-added tax.  Some economists say the so-called GST, which kicked off July 1, may eventually add nearly 1 percentage point to GDP growth.

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Almost seven million of the eight million VAT and service-tax taxpayers under the old system have registered for GST, and more than 560,000 businesses have signed up to pay tax for the first time, the government says.  The government hopes that many more small businesses will register over time as the benefits of a tax credits system — and the threat of penalties — lures them in.  Meanwhile, the logistics industry is showing the first visible signs of the transformation the tax could deliver by easing some of India’s biggest economic drags — corruption and bureaucracy.

The industry contributes about 13% to the country’s GDP but is still underdeveloped, highly fragmented and fraught with inefficiencies, according to financial-services provider Avendus Capital Pvt. Ltd.  Before GST was implemented, it would take 11 days for a container to travel from Shanghai to Mumbai, but almost double that to get from Mumbai to Delhi, the World Bank said in a report.  Up to a quarter of journey time was spent at checkpoints.  By eliminating those, logistics costs could fall by as much as 20%, CRISIL Research, the Indian Unit of Standard & Poor’s, said in a report.  Trucking companies say while shipping orders are down as companies get used to GST, the elimination of border tax posts in most Indian states has expedited the movement of goods and cut fuel and labor costs.  “Implementation of GST is already showing significant efficiency gains in supply chain and transportation,” a spokesman for Wal-Mart India said.

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