After a tortuous legislative battle, India is finally about to enact a unified goods and services tax that could provide a boon for the world’s fastest-growing major economy. If the ruling party of Prime Minister Narendra Modi has its way, the tax will be introduced on July 1, 11 years after it was first proposed in the Indian parliament.
The new tax represents the most ambitious such reform in India since independence 70 years ago. It could also be the most significant economic development in the country since deregulation and privatisation began in the early 1990s. But rushing to meet the July 1 deadline would be a big mistake.
The idea of a national GST to replace at least 15 different tax codes at the central and state level is an unimpeachably good one. It enjoys overwhelming bipartisan support in parliament.
This year the World Bank ranked India 172 out of 190 countries when it came to ease of paying taxes. The new GST could shoot it up the ranking while reducing tax evasion, paperwork, corruption and logistics costs. It has the potential to boost India’s gross domestic product in the medium term by as much as 2 per cent, according to some estimates.
Today, taxes account for about 25 per cent of the final consumer price of Indian-made goods because of the plethora of state taxes levied at state lines and elsewhere. The fact that manufacturing accounts for just 16 per cent of India’s GDP, compared with more than double that in China, is often blamed on India’s byzantine tax regime.
Only 12.5m of India’s 1.3bn citizens pay income tax and a well-designed and implemented GST should be able to broaden the tax base while reducing consumer prices and stimulating consumption.
But here is the crucial point: India is not known for strong implementation or well-designed legislation. Already, thanks to a series of political compromises between the central government and Indian states, the simple nationwide single tax rate that was once envisaged has morphed into four different rates, ranging from 5 per cent to 28 per cent, without a clear idea of what items fall into each tax band.
The worst outcome for businesses, local governments and New Delhi would be for the GST to fail spectacularly in the first couple of months thanks to poor planning and incompetent execution. It is easy to see how rushed implementation could lead to budget shortfalls, a burst of inflation, long queues of trucks waiting to cross state borders or even shortages of some essential goods. In the case of Australia - a far smaller, more homogenous and efficient economy than India - it took a year to introduce GST after it was passed by parliament in 1999 and that timetable is now generally considered to have been too quick.
The final parliamentary hurdle facing GST in India was only cleared late last month and the decision on what rates will be charged on what items is supposed to be made next month. Quite understandably, Indian businesses are shocked to find they will have just six weeks to prepare for the momentous new tax code. Many are now clamouring against a reform they have been advocating for decades.
Mr Modi and his government must recognise that hasty implementation will damage a universally popular proposal. Current legislation would allow the new tax to be introduced any time before September but even this deadline could probably be extended given the bipartisan support it enjoys. Having waited so long already, India can afford a few more months in the interest of getting this right.
