India’s sales tax is a victory for Modi

Posted on August 11, 2016

Indian Prime Minister Narendra Modi delivers his speech during the inauguration of the conference " Advancing Asia- Investing for the future" in New Delhi on March 12, 2016. / AFP / PRAKASH SINGH (Photo credit should read PRAKASH SINGH/AFP/Getty Images)©AFP

It took several decades but India got there at last. The upper house of parliament on Wednesday approved a bill creating a nationwide goods and services tax, the source of bitter contention for nearly a decade.

This new value added tax could be the most important reform to India’s economy since the first burst of privatisation and deregulation in the early 1990s. It should facilitate the country’s internal market by making it easier for goods to be transported between states without being caught in a tangle of different local tax regimes.

    It is often underestimated by those outside India
    the extent to which attempts at harmonisation and liberalisation are snarled up in resistance at state and local level. The weakness of the central government in New Delhi may be a bulwark against autocracy but it also makes it harder to get things done. India has a reputation for protectionism in the global trading system; its states do much the same to each other at home.

    Countries with largely centralised systems of government, such as those in western Europe, often have VAT. Indeed, there are rules in the EU about member countries setting a minimum standard rate to prevent them undercutting each other.

    By contrast, in a nation such as the US, where political power is much more dispersed, states guard their right to impose sales taxes. A national VAT may command support among academic economists but it garners little backing on Capitol Hill. In Australia, a goods and services tax that had been a source of political wrangling for as long as the Indian version, was finally passed only on the understanding that the money raised would be redistributed back to the states.

    India Inc celebrates tax reform milestone

    An Indian labourer loads grain sakcs on to a truck at a railway goods yard in Chennai on August 3, 2016. Finance Minister Arun Jaitley said India was on the cusp of its biggest tax reform since independence ahead of a vote in parliament later August 3 on a new national sales tax. The Goods and Services Tax (GST) will replace a patchwork of central and state levies on goods and services and is one of Prime Minister Narendra Modi's biggest reforms since taking power in May 2014. / AFP / ARUN SANKAR (Photo credit should read ARUN SANKAR/AFP/Getty Images)

    Businesses expect GST to slash bureaucratic and logistical costs

    Some of the important details of India’s GST have yet to be finalised. The government has still to decide the rate for the tax, and some state legislatures have asked for it to be well above 20 per cent — a level that might well encourage exactly the sort of tax evasion that the levy is supposed to address. The government may also discover that arguments about exemptions for certain goods have a way of periodically blowing up. “Pasty-gate”, a particularly bizarre dispute about VAT on hot baked goods, was the central issue of contention surrounding the UK Budget of 2012.

    Still, the approval of the tax is a significant victory for Prime Minister Narendra Modi, whose reputation as an economic reformer was looking fragile. Introducing sales or value added taxes is rarely easy: a levy that acts directly on the prices of goods in the shops unsurprisingly has a way of arousing broad opposition. In a polity as fragmented and decentralised as India’s, this is a seriously impressive achievement.

    alan.beattie@ft.com

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