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GST: How India is on the verge of turning its good tax bad

Feb 27, 2017

India’s tax system is one amongst the most composite systems in the world with different mandatory payments. This is the reason why so many people are eagerly awaiting the rollout of the Indian government’s first real attempt at systematic tax reform: Goods and Services Tax (GST). The GST, which is supposed to interweave India’s multiple taxes and get it another one umbrella-GST so that it is easier for businesses to process taxes.

Prime Minister Narendra Modi’s government deserves credit for cobbling together the political alliance needed to pass the multifaceted reform. The bill was passed after getting the nod from two-thirds majority in both the Houses of Parliament and 50% in the state assemblies. But the government may now be denting its own victory. The new council of central and state finance ministers authorized to administer the tax has decided on GST with four levels and numerous exceptions.

Various surcharges and cesses are planned on certain kind of goods. In total, the number of rates may end up being closer to seven or eight. This is not exactly the kind of ease that the GST promised to bring to tax payers in India.

The GST was supposed to be straightforward: a single rate with no exemptions and a single tax form. This would assist companies to learn what exactly they need to pay and what input costs they can set off, without excessive paperwork. Rather, with the proposed rates, it is unclear whether the new GST will in fact reduce paperwork or it may even increase the number of forms that companies will have to submit.

It seems that the multiple-rate GST means: Private companies have an enticement to go to New Delhi and push their products to move to a lower tax slab.

In other words, the only people likely to emerge from this are the bureaucrats who have somehow managed to retain power over the private sector. It is likely they persuaded the politicians that multiple rates were essential to ensure revenue will not decline. In the process, they have ignored advice from economists. The government’s own chief economic adviser produced a report earlier this year arguing for two rates, with a maximum rate of 18%. The government’s different dilutions to GST will have a big effect on the growth-boosting effect of the reform, generating a 0.4% bang.

Read: Will GST exacerbate India’s income divergence?

Over time, it is still a possibility that the government might cut down the number of exemptions, the number of different rates and the required amount of paperwork. This requires India’s elected politicians, in both New Delhi and state capitals, to take a careful look at the data, be lithe and pay no heed to the objections of their bureaucrats. The alternate could be that GST may not make enough of a difference to India’s farcically intricate tax system to shift the country’s growth track.

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