India's crackdown on cash imperils pivotal national tax reform

Indian Prime Minister Narendra Modi's crackdown on the cash economy has shattered the consensus needed for a new national sales tax, plunging his boldest reform into limbo and threatening to entrench an economic slowdown.

Modi's government already had its work cut out to finalise a deal with India's 29 federal states to launch a Goods and Services Tax (GST) on April 1 that would transform Asia's third largest economy into a single market for the first time.

But his decision to scrap 86 percent of the cash in circulation, in a bid to purge the economy of illicit "black money", has caused huge disruption.

A slump in business activity stemming from the cash crunch has caused the revenue of state governments, which collect value-added tax on goods and other duties, to slump by 25-40 percent.

The states won't risk another setback by rushing the sales tax into force.

"The investment and economic environment in the country is in bad shape," said West Bengal Finance Minister Amit Mitra, who earlier headed a panel tasked with building a consensus on the GST. "How is the country going to absorb the dual shock of GST and demonetisation?"

(REUTERS)