18 August 2016 | By Shehla Hasan Insight

India takes a leap towards a single market

Insight: Shehla Hasan, CBI country head and policy director, India

Its "one nation, one tax" strategy shows the government's ambition to build on economic growth

After 13 years of debate, dispute and patience, India’s parliament has passed its biggest ever indirect tax reform. It’s a leap towards improving the ease of doing business in the country – helping to transform it into a single market by doing away with a plethora of taxes that vary from one state to the next.

The Goods and Services Tax (GST) replaces various central taxes, including central excise duty and service tax. It also absorbs state level taxes, from state VAT, luxury and entry tax to charges on advertising and lotteries.

And once introduced, it is expected to add 1.5-2 percent to the country’s GDP through cost and time savings. The online platform being built by CBI member Infosys to implement the new tax will also boost transparency and efficiency, say economic commentators.

What happens next

But although the government wants the GST in place by April 2017, a phase of tough negotiations with the states lies ahead, particularly around administrative control over tax assessment. Three more enabling laws need to be passed in order to give shape to the next tax regime – and the final bill will have to be ratified by at least 15 out of India’s 29 states. The rate is also yet to be fixed – and that could be anything from 15.5 per cent to over 18 per cent, depending on the revenue-neutral rate agreed between producing and consuming states. 

The operational aspect of the tax will be looked after by the high-powered GST Council chaired by the Union Finance Minister Mr Arun Jaitley, who can be credited with painstakingly building consensus over the past two years. The council will comprise his deputy and state finance ministers and will recommend the tax rates including the band rates for goods and services.

Interestingly, some goods, such as alcohol and petroleum products, are being deliberately kept out of the tax’s scope. These products traditionally have been sources of large chunks of revenue for state governments who do not want to share taxes earned with the central government. The GST Council will decide how long these exemptions will continue.

Further political challenges are also expected. For the first time, several new businesses will be coming into the tax net. This might prompt political resistance from regional opposition groups leading to further delay in getting the bill ratified by states. The negotiation for distribution of revenue between the states and centre and compensation to states may become cumbersome and complex.

Policy makers are bracing for more local surprises. One of the examples being cited is job losses in the warehousing sector. Currently, many businesses have different warehouses in different states to avoid interstate taxes. With GST, India will become a common market without any difference between interstate or intrastate sales – and companies will need fewer warehouses as a result.

But although the parliamentary approval of this tax is only seen as the “end of the beginning”, it is being seen as a bold step towards cooperative federalism. Its passage adds to the air of positivity that comes with India remaining the fastest growing economy on the planet. And despite the size and scale of the challenges, there is general consensus that it is a step worth taking, to propel the most populous democracy towards greater economic growth.