MUMBAI – 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.
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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.
Still, the new system has teething pains.
Many of India's millions of small-business owners say they haven't had enough time to prepare. They don't know which of the multiple rates to pay or understand how to file their invoices. Many lack the stable internet connection needed to file.
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The textile industry, India's second-largest employer after agriculture, has had disruptions as traders adjust. It and other industries have organized strikes and protests against the plan, saying they weren't ready.
The big test comes on Sept. 5 when businesses are required to file their first tax returns. It will then also become clear whether the government tax portal vital to the plan is ready to upload and process them.
But many experts are encouraged by the process so far, the culmination of a decade of wrangling between Indian states and the central government.
"Generally things have gone smoother than expected," said Sachin Menon, partner and national head of indirect tax for KPMG.
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.
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.
Experts say Indian economic growth may be lifted by reduced transportation times and increased compliance that will boost revenue for the government that could be spent on infrastructure, sanitation and education.
"Before the GST, some companies had multiple warehousing across different states only because they didn't want to move goods across state borders," said Rajiv Biswas, an economist at IHS Markit.
Mahesh Fogla, chief financial officer of Mumbai-based Patel Integrated Logistics, said he expected the tax revamp to save his company up to the equivalent of $620,000 annually and yield a 25% increase in profit. Antique Stock Broking Ltd., a Mumbai financial-services company, estimated in a report that drivers will save up to about $115 in bribes on each trip in checkpoint graft.
However groups of officials known as "flying squads," who carry out spot checks to examine paperwork, still demand payments, said Navin Gupta, secretary-general of industry lobby the All India Motor Transport Congress. "Physically the check post barriers have been removed, but the flying squads are still there," he said.
At the deserted checkpoint in Mankhurd just outside Mumbai, where Mr. Shaji and other drivers previously had to stop to enter the megacity, one official said 2,500 vehicles would pass through daily to be assessed for taxes.
The 43-year-old Mr. Shaji, who has been driving for 25 years, said that before the GST he would have to wait for hours as hundreds of items were checked and the tax calculated at three tax points along the route.
"Now we can pre-calculate our travel time," he said, relaxing with a cigarette after a long drive. "I am free of tension and I can spend more time with my family and friends."
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(END) Dow Jones Newswires
July 19, 2017 05:44 ET (09:44 GMT)