India sets rates in major sales tax reform

Indian shoppers Image copyright AFP

India has set rates for its new Goods and Services Tax (GST) system, its biggest tax reform since independence.

The new rates will range between 5% and 28% depending on the product, with 12% and 18% as the standard.

The long-awaited changes aim to streamline the country's fragmented tax system and transform it into a single market.

Currently, everything sold in India is subject to a multitude of taxes varying from state to state.

Indian businesses have been lobbying for the countrywide tax rates as the reform is expected to reduce costs, particularly for shipping goods across state borders.

The country's finance minister Arun Jaitley described the tax reform as "transformative", telling the BBC it would increase efficiency and tax compliance as well as bringing in additional revenue.

It would also allow a "seamless transfer of goods and services across the country," Mr Jaitley said.

'The devil in the detail'

The changes mark a "significant development", said Santosh Dalvi of KPMG in India.

There has been no announcement yet, though, of which products fall into which of the tax categories.

Image copyright AFP
Image caption The tax will help goods move seamlessly across state borders

"While one can have some guesswork around the GST rate for some of the products, the devil is in the detail when the final classification list will be released which is the most challenging task for the policy makers," said Mr Dalvi.

According to Mr Jaitley, half of the items in the consumer price index would not be taxed at all to protect the poor.

The index is a basket of consumer goods and services used to measure changing prices and inflation.

Boosting growth

A central plank of Prime Minister Narendra Modi's economic agenda, the centralised tax is intended to cut through the red tape and corruption generated by the swathe of state taxes currently in force.

Image copyright AFP
Image caption The reform is thought to boost growth by more than 2%

Currently, goods brought for example from the northern city of Haryana to Chennai are taxed in six different states.

With every state deciding its own taxes, it also encourages local protectionism.

Optimistic estimates suggest the changes could bring more than 2% of added economic growth.

India already has overtaken China as the world's fastest growing economy.

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