A tax overhaul will have welcome, if unpredictable,
consequences
GIVEN how few voters enjoy paying them, politicians
rarely trumpet the advent of new taxes. But the passage of a new
goods-and-services tax (GST) in India’s upper house on August 3rd is a deserved
exception. Well over a decade in the making, the new value-added tax promises
to subsume India’s miasma of local and national levies into a single payment,
thus unifying the country’s 29 states and 1.3 billion people into a common
market for the first time. The government of Narendra Modi, never averse to
over-hyping what turn out to be modest policy tweaks, has enacted its most
important reform to date.
Few countries are fiddlier than India when it comes to
paying taxes; the World Bank ranks it 157th out of 189 for simplicity. Both the
central government and powerful state legislatures impose a dizzying array of
charges. Because the rates differ between states, making stuff in one and
selling it in another is often harder within India than it is in trade blocs
such as NAFTA or the European Union. Queues of lorries idle at India’s state
boundaries much in the same way they do at international borders.
That should change with the GST, essentially an
agreement among all states to charge the same (still to be decided) indirect
tax rates. Businesses are thrilled at the idea of being able to distribute
their products from a single warehouse, say, rather than replicating supply
chains in each state. Thick, exception-riddled tax codes—car sales are liable
to six different levies at various rates, depending on the length of the
vehicle, engine size and ground clearance, for example—are to be replaced with
a single GST rate to be applied to all goods and services.
Better yet, the GST will be due on the basis of value
added. That avoids businesses being thwacked by taxes on the entire value of
the products they buy and sell rather than just the value they create—a
situation that often made it cheaper to import stuff rather than make it
locally. Just as importantly, by requiring businesses to document the prices at
which they buy inputs and sell products (unless they wish to pay higher taxes),
it will force vast swathes of the economy into the reach of the taxman.
Economists and technocrats have long backed the GST,
which they think could boost economic output by 1-2 percentage points a year.
Their calls were insufficient to overcome India’s petty politics: GST proposals
stalled under governments of left and right since it was first mooted in 2000.
Mr Modi, as chief minister of Gujarat state until 2014, helped thwart the
previous government’s GST plans and has faced retaliatory obstructionism since.
A committee of various states’ finance ministers helped convince regional
parties in the upper house, which Mr Modi’s government does not control, to
clear the blockage.
Because the tax overhaul requires a new amendment to
the constitution, and therefore the backing of at least 15 state legislatures,
it will take several months to enact. Few expect it to be derailed, but a
deadline of April 2017 seems unlikely to be met. Though efforts to water down
the bill (for example by exempting petrol) appear to have been overcome, its
precise workings remain undecided. Even the GST rate is unknown; a government
study mooted 17-18% but some states (which will receive the cash raised) would
like it to be higher.
Such nitty-gritty will be fought over in the “GST
council”, a novel body which will represent both state and federal executive
branches but looks likely to be dominated by ministers sitting in New Delhi.
Arvind Subramanian, the government’s chief economic adviser, calls the whole
construct “a voluntary pooling of sovereignty in the name of co-operative
federalism”, borrowing freely from the lexicon once used by the builders of the
EU’s common market a generation ago. Such projects do occasionally run into
bouts of difficulty.
Indeed, the new council and the tax it will administer
go against a recent trend for decentralising power from New Delhi to the
various state capitals. Powerful chief ministers sitting in the provinces will
be more dependent on revenue collected federally and less on purse-strings they
control themselves. Money will shift from (richer) states that make things
towards (poorer) ones that consume them, too. The advent of a single tax to
rule them all may come to shape Indian politics as much as it does the economy.
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