India’s Good and Simple Tax
Harsh Tiwari, Fiscal Policy Contributor
At the stroke of the midnight hour India awakens (to indulge in rhetoric borrowed from Nehru, the first Prime Minister of India) to a very novel and much awaited system of taxation. Beginning July 1, India implements one of its biggest tax reforms yet which is known as the Goods and Services Tax (GST). The Goods and Services Tax comes after many roadblocks and a great gestation of political will which was consistently delaying this laudable policy’s adoption and implementation.
The GST overhauls a taxation system that was plagued by complications and compliance issues. The GST subsumes many taxes collected by the States of India and the Federal Government under a single tax regime. The GST can safely be called the crowning glory of the current Prime Minister Narendra Modi’s economic agenda which seeks to end the “tax terrorism” that was hurting businesses and consumers alike due to it’s complexity and unreasonable structure, deregulation, and kick start the Indian economy. However, like any policy, the GST is not without its demerits, which happen to be considerable.
India’s taxation policy, before the GST, was notoriously complex. Indirect Taxes were split between the Federal Government and the States, certain taxes such as Sales tax (a tax on the sale of goods) were paid to the Federal Government while the Value Added Tax (a tax on the profits of sale ) were paid to the State Governments. There were manifold problems that arose due to this.
Firstly, companies would have to take tremendous burdens to pay the multiple taxes to different authorities. The complexities of the rules governing the different taxes paid to the different authorities meant that companies were unreasonably disturbed by tax compliance issues. Secondly, a two-fold tax system meant that companies were many-a-times heavily burdened by a double tax on their commodities. Thirdly, the States were not uniform in levying taxes, some would levy more tax than others, this compounded the already existent problems with the tax system for businesses which sought to expand to other states.
Thus, the taxation policy in India discouraged economic growth, made compliance as well as collection a problematic issue, and discouraged foreign investors who found it difficult to do business in a country with 29 State tax jurisdictions and the Federal tax jurisdiction. The GST, at least in principle, seeks to do away with these problems associated with the Indian tax system and seeks to create a singular Goods and Services tax of three different kinds which has different rates for different types of commodities.
The GST is the result of the Modi government’s fervent dedication to the implementation of the reform. The Goods and Services tax found many political opponents who cited many legitimate concerns. For starters, many States were worried about a reduction in their tax revenues that would ensue due to the GST which would be levied by the Federal Government. Furthermore, many political stakeholders stated that a single rate of Goods and Services Tax would be detrimental to small businesses as the GST would include the earlier taxes and thus would be unreasonably high for small companies.
Lastly, many of the opposition parties were virulently against the GST in order to prevent the Modi government from acquiring the great amount of political capital that would be gained from the GST. Although, PM Modi commands a thumping majority in the lower house of the Indian Parliament, he could not bypass these concerns. The passage of the GST required a constitutional amendment which could only be passed with a two-thirds majority and the approval of at least one-half of the states. This required nationwide political consensus. To accomplish this, Modi, along with the country’s Finance Minister Arun Jaitley, began the most sagacious political negotiations ever, they entered the most impassioned pleas for the reform in the public arena and used every ounce of political maneuvering to get the reform through after an expanse of two years.
The GST is predicted to have a very healthy impact on the economy. According to The Economic Times, “An estimate by economic think tank NCAER had earlier projected an increase of 1-2% in GDP after GST is implemented.” Furthermore, The Business Line states that “The goods and services tax to be implemented from July 1 would help raise India’s medium-term growth to above eight per cent, the International Monetary Fund has said, adding that the reforms are expected to pay off in terms of higher growth in the future.”
While these estimates might be tantamount to mere speculations, it is undeniable that a tax overhaul will be welcome for economic growth. However, the extent of such a growth may be seriously curtailed due the fact that the GST has different tax slabs for different kinds of commodities. These provisions of the GST may not completely simplify tax compliance or decrease tax burdens. The Economist notes that “[t]he GST, although welcome, is unnecessarily complicated and bureaucratic, greatly reducing its efficiency.”
Whatever may be the debate on the GST’s merits and demerits, one has to admit that it is a long-awaited big bang reform of the Indian economy. Prime Minister Modi, with the launch of the GST, has made even his detractors bow to him and he has cemented his place in the edifice of India’s history. It is my sincere hope that from now on, the Indian Prime Minister will continue his reforms agenda with the willingness to iron out future problems that may be associated with the GST.
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