In Finance Minister Pranab Mukherjee the central government has its ablest midwife to deliver a new taxation regime for the country. Mr Mukherjee’s ability to concede ground in order to achieve the larger goal was amply on display this week over the rollout of a uniform goods and services tax (GST), arguably India’s most ambitious reform that has been 30 years in the making. A dual structure of the tax as well as an initial divergence in the treatment of merchandise and services are a small price to pay if the system gets off the ground next April. The tax rates proposed by Mr Mukherjee ought to achieve the holy grail of a unified 16 per cent levy on all forms economic activity three years hence. Again by keeping alcohol and energy out of the new tax structure, the finance minister has addressed the states’ misgivings about their declining power over duties and the resultant loss of revenue. Finally, Mr Mukherjee has agreed to underwrite any losses the states might incur because of the shift.
The 13th Finance Commission has estimated that the switch to GST will knock 1.22-2.53 per cent off retail prices and bump up economic growth by 1.5 percentage points a year, leading to better tax collection at all levels. The GST’s charms are, however, not limited to the immediate revenue gains for the government. Subsuming the plethora of
duties levied by the Centre and states into a single tax should radically alter India’s economic landscape. The tax eliminates the cascading incidence of central, state and local levies. And the system is self-policing by taxing only the added value.
That a single tax on output and services is better is established by the feeble protest from states, which stand to lose a chunk of their discretionary powers. The value-added tax ran into more opposition, delaying its imposition by over a decade. Its eventual success will help pave India’s transition to a uni-tax in April 2010. The delay in adopting the GST has more to do with legislative and administrative logistics than with ideological differences. When it comes into force, the GST will mark a turning point in our journey to a rules-based tax system. 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 GST is a game changer, and it is overdue.