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In the greater common good

India is on the verge of equipping itself with a spanking new tax regime that sheds much of the baggage it had acquired over half a century.

india Updated: Dec 17, 2009 20:45 IST

India is on the verge of equipping itself with a spanking new tax regime that sheds much of the baggage it had acquired over half a century. A common goods and services tax and a simpler tax on income and wealth should take the stress out of paying the sovereign its due. The new code for indirect taxes, drawn up by the Thirteenth Finance Commission, has gone back to first principles to make the system more equitable, transparent and competitive. That a single tax on output and services is better all around is established by the feeble protest — restricted to its rate — from states, which stand to lose a chunk of their discretionary powers. The value-added tax ran into more formidable opposition, delaying its imposition by over a decade. Its eventual success will pave India’s transition to a uni-tax any time after April 2010.

Subsuming the plethora of imposts levied by the Centre and states into a single tax on goods and services should radically alter India’s economic landscape. State governments will lose scope for tax arbitrage, which fragments the Indian market.

The tax eliminates the cascading incidence of central, state and local levies. The system is self-policing by taxing only the added value. And trade distorting levies will make way for a level playing field. The Finance Commission reckons the switch to the new tax will knock 1.22-2.53 per cent off retail prices and bump up economic growth by 1.5 percentage points a year. The 12 per cent rate for the tax, recommended by the Centre and endorsed by the Commission, will also mark India’s return to fiscal prudence by reversing the excise giveaways during the financial crisis.

The delay in adopting the goods and services tax has more to do with legislative and administrative logistics than with ideological differences. When it comes into force, the unified impost will mark a turning point in our journey to a rules-based tax system. Although we are far from regimes in the West, where tax rates change rarely, if at all, India needs to get there if it is serious about being a “well-regulated free market”. Discretionary taxation by states like those on entry or purchase of goods and easy-to-collect revenue like entertainment and luxury taxes must yield to a more formulaic approach. The assumption behind lower rates and fewer exemptions is more people pay taxes if they are reasonable, and stable. The unified goods and services tax is a game-changer, and it is overdue.