http://www.bloomberg.com/apps/news?pid=10000039&sid=aSlNNMEMUC4Q&refer=columnist_mukherjee India to Move Closer to a Single Market in 2005: Andy Mukherjee Dec. 23 (Bloomberg) -- It will undoubtedly rank among the biggest events on India's economic calendar next year. Starting April 1, the country will take a first step toward becoming a single, billion-people market for everything from cars to soap. After much hand-wringing, most of India's 28 provinces have agreed to shelve the costly levies they impose on goods that are produced or consumed inside their territories and replace them with a ``value-added tax,'' a mechanism under which a company pays a tax on its output and claims back the tax that has already been paid on inputs. It's going to be the biggest overhaul of the country's tax system in a half century and, when the revamp is complete, it will bring India on par with countries like China that allow manufacturers to pay their taxes in proportion to the ``value'' added by them to the final product. Currently in India, a company manufacturing in province ``A'' and selling in ``B'' pays a federal sales tax in province ``A'' and also an entry tax plus a state sales tax in province ``B.'' It also pays a tax charged by the municipality where the goods are sold. Most of the taxes are calculated on the final price. So, the municipal levy is a double tax on provincial sales tax, which is a double tax on the federal sales tax. What's worse, a truck that reaches ``B'' by going through provinces ``C'' and ``D'' is routinely held up at each border crossing as officials ensure their state isn't owed any tax for the goods in transit. With a value-added levy, there'll be no tax on tax. Prices will fall, and company profits will rise. As entry taxes are abolished, goods will move faster across state borders. Productivity Gains Indian exporters, whose competitiveness is hamstrung by the myriad taxes and levies, will benefit. ``For all exports made out of the country,'' Ramesh Chandra, the top official coordinating the shift to value-added taxes, said recently in a presentation, ``tax paid within the state will be refunded in full.'' The proposed rate for the Indian value-added tax is 12.5 percent, compared with 17 percent in China, and a 5 percent goods and service tax in Singapore. ``The most important outcome of the introduction of state VAT would be the removal of hindrances in the movement of goods across the country,'' writes Ila Patnaik, economics editor at the Indian Express newspaper in New Delhi. ``This is expected to lead to a sharp increase in productivity across all states, a reduction in working capital, and swift movement of many perishables,'' Patnaik says. Trucks can complete the 880-mile journey between the national capital of New Delhi and the financial center of Mumbai in a matter of hours, compared with several days now. Strong Opposition There are those who don't want this sensible plan to be implemented. Honest traders are concerned about more paperwork, while dishonest traders rightly fear their buyers will demand proof of tax paid in order to claim their own refunds. Provinces like the northern state of Uttar Pradesh, which has millions of consumers but not much of industry, now can collect revenue through local sales tax on ``value'' added elsewhere. They are reluctant to give up their free lunch and settle for a smaller share of the value-added tax. It's because of the foot-dragging by provinces that the introduction of the value-added tax has missed several deadlines in the past. Even so, further delay is unlikely because the federal government has promised to compensate states fully for any loss of revenue in the first year. Local levies account for between half and two-thirds of provincial governments' income. Compromise Solution After a decade of discussions, India's value-added tax will still have many weaknesses. For one, services will continue to be taxed separately. A manufacturer buying a lathe to make screws can claim tax paid on the machine; if he buys software to design his products, he gets no credit. Besides, while provinces have said they'll do away with their sales taxes, they're reserving the right to impose entry taxes, which are the bane of productivity improvements. The worst part is that taxes owed to province `A' can only be set off against tax paid to `A', not against what has been paid to `B'. With all the shortcomings in the plan, it's still remarkable that Indian provinces have agreed to give up their constitutional right to impose sales taxes, presumably in the larger national interest. It's a big sacrifice because sales tax is pretty much the only taxing power provinces have. Unlike U.S. states, Indian provinces can't impose income taxes. If the 2005 deadline is met, a common market in India will no longer remain an impossible dream. Yahoo! Messenger - Log on with your mobile phone! [Non-text portions of this message have been removed] ------------------------ Yahoo! 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