India moved a step closer to creating a national sales tax but a deal on

rates reached on Thursday will hit some businesses harder than others,
while its complexity will dilute any boost to growth and undermine its
reliability as a revenue generator.

The Goods and Services Tax (GST), due to be rolled out from April 1,
2017, had been billed as the one reform that could help Prime Minister
Narendra Modi deliver on his jobs and growth agenda. In a key Modi win,
parliament amended the constitution in August to clear the way for the
GST, which would unify Asia's third-largest economy into a common
market for the first time.

The GST Council, set up to oversee the tax, agreed on a more steeply
progressive structure for goods than earlier foreseen with rates of 5, 12,
18 and 28 percent, depending on the kind of product involved. The top
rate, Jaitley said, would apply to the kind of goods bought by middle-class
Indians.

On top of that, essentials like grains that make up half the consumer price
index would not be taxed at all. Finally, a "cess" - a separate central tax -
would be added to the top 28 percent GST rate on luxury cars and
harmful products like tobacco and fizzy drinks.

The total burden of this "sin" tax still has to be worked out, as does the
rate applying to services that are now taxed at a rate of 15 percent.

"India is like the European Union with a central government," said

Harishanker Subramanian, head of indirect tax at EY. "This is fiscal
federalism. It's not easy."

Despite the loose ends, it now looks increasingly likely that parliament,
which opens its winter session on Nov. 16, will be able to pass key GST
laws, as state assemblies must also do, to keep the launch timeline on
track.

FOGGY OUTLOOK

The GST should be a positive development for Jay Kannaiyan, who runs
a startup that makes and sells low-cost air purifiers, a product in big
demand because of an air pollution crisis in the capital New Delhi and
other Indian cities.

Kannaiyan backs the GST because it would free his firm, Smart Air Filters
Pvt Ltd, from the red tape arising from value-added tax (VAT) that is
currently collected by the states and is one of several levies due to be
abolished under the tax reform.

VAT rules vary widely, and the tax can be levied at different times during
the transfer of goods, depending on the state.

"It is a hassle as it slows down our operations," Kannaiyan, 35, said at his
tiny workspace in a dusty commercial district on Delhi's southern fringes.

His greatest worry is the possibility that consumer durables will be taxed
at the top 28 percent GST rate, not the 18 percent earlier foreseen,
hurting his margins. Which product is assigned to which rate still has to
be worked out.

The uncertainty "hurts us, it hurts our planning," said Kannaiyan, who
plans to more than double sales in the next year.

RELABELED, NOT REFORMED

It's a far cry from the attributes of a so-called "good tax" - that is low, flat
and broad. And advocates of a simpler GST have gone on the offensive,
denouncing the current proposal as a mere relabeling; not a genuine
reform.

Officials and experts involved in the policy process say Jaitley took the
path of least resistance by pitching tax rates broadly in line with the
existing burden to avoid any unwelcome spike in inflation when the GST
comes into force.

"The approach outlined by the authorities signals a disappointing

beginning which well could have been otherwise," said Vijay Kelkar, a
former finance secretary who penned a landmark 2009 report on the
GST.
Jaitley argues that multiple GST rates are needed to prevent the tax
falling too hard on the poor. "Air conditioners and hawai chappals cannot
be taxed at the same rate," he wrote in a recent blog post, using the Hindi
name for flip flops.

GROWTH BOOST DILUTED

Business groups, tax experts and economists say the GST, if passed in
this form, would generate less of a lift to economic growth and state
revenues than a simpler tax.

"An ideal GST would have carried one single rate with very few
exemptions - instead what we've got is a multiple tax rate structure and
multiple exemptions," said Pranjul Bhandari, chief India economist at
HSBC, who has halved her forecast of the GST's growth boost to 0.4 of a
percentage point.

Where accountants do find fault is with the proposed cess that would
raise funds for Jaitley to offset initial revenue losses to states arising from
the GST.

"The concept of a cess is a distortion," said Sachin Menon, head of

indirect tax at KPMG India. "The very purpose of the GST is to remove
multiple taxes and to have a uniform law and uniform taxes across the
country."