Sep 18, 2015
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India's dream of borderless trade grinds to a halt at checkpoints

Sep 18, 2015

At the Walayar checkpoint in southern India, lines of idle trucks stretch as far as the eye can see in both directions along the tree-lined interstate highway, waiting for clearance from tax inspectors that can take days to complete.

Delays are so bad that textile entrepreneur D Bala Sundaram has stopped sending his trucks to the international container terminal at nearby Cochin, instead diverting them hundreds of kilometres to a smaller regional port and onwards via Sri Lanka.

"Our containers would get stuck for four to five days," said Sundaram, who runs a firm with an annual turnover of $150 million. "Officials at the checkpost are finicky."

The rollout of a nationwide goods and services tax (GST) from April was supposed to sweep away hundreds of checkposts on India's state borders, paving the way for the seamless movement of goods from the tropical south to the Himalayas in the north.

But political opposition and the dilution of some of the tax's key tenets mean hopes are fading that the checkposts will be demolished any time soon, a major blow for Prime Minister Narendra Modi's reform agenda - and for India's economy.

The rollout of the long-delayed GST regularly tops the list of demands made by CEOs of Indian and foreign companies.

Finance Minister Arun Jaitley calls the new sales tax a "game changer" that will subsume a slew of federal and state levies, making Asia's third-largest economy one of the world's largest single markets and bumping up economic growth.

But opposition parties prevented a vote on the GST in the last session of parliament, making a rollout next April unlikely.


Even when the tax is eventually implemented, concessions made to win support from states mean many of the obstructions to a customs union will stay.

For example, while the GST will be collected on goods and services in states where they are consumed, Jaitley allowed a 1 percent additional levy on the cross-border transport of goods, to please states with large manufacturing bases.

Items such as alcohol, tobacco and petrol have been kept out of the new tax bill. States have also been given the flexibility to fix their GST rates within a band, providing arbitrage in the inter-state movement of goods.

"Enforcement is definitely required, we cannot do away with it at any point," said a senior state government official in Tamil Nadu. "We will need checkposts."

Other provinces have similar plans to check tax evasion. States such as Maharashtra, which includes commercial capital Mumbai, are even erecting new checkpoints.


India has more than 650 interstate checkpoints, which studies say increase truck travel time by a quarter.

Road traffic accounts for about 60 percent of all freight movement in India and such delays, McKinsey estimates, inflate logistics costs to 13 percent of India's gross domestic product.

Sundaram, whose KG Group is one of the biggest firms in western Tamil Nadu, says sending his shipments from the industrial city of Coimbatore hundreds of kilometres in the wrong direction to Tuticorin port, on Tamil Nadu's southern coast, has pushed up his freight costs by 20 percent.

Unlike Cochin, the Tuticorin port is not a container terminal, so his cargo must go from there to Colombo, where it is loaded on to a container ship to be sent around the globe. But the additional cost is worth it for Sundaram, who says it means he can honour his commitments on time.

"We can give our clients an exact date when the cargo will reach its destination," he said. "With the Cochin port, we simply cannot be sure when or whether our cargo will reach the port itself."


These travails underscore the challenge for Modi, who has set an ambitious goal of improving India's position on a World Bank "Doing Business" ranking from a woeful 142 of 189 to the top 50 by 2017.

Jaitley views the GST rollout as the biggest push in achieving that target. He and his aides argue that, over time, higher tax collections and better compliance under the GST will encourage states to start dismantling the border checkposts.

"Once you start tracking sales online, there will be less need to have checkposts," Rashmi Verma, a senior official in the finance ministry revenue department, told Reuters. "The cost of maintaining these checkposts will far outweigh the benefits."

Saloni Roy, senior director at tax consultants Deloitte, agrees that the new tax will be a big improvement, but is not sure it will herald a borderless trade.

"When you have a system that is target driven, there is an incentive for tax officials to squeeze every drop that they can," she said.

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