Path Clears for GST

FINALLY THERE IS light at the end of the tunnel for the Goods and Services Tax (GST). There is now a realistic chance that the ambitious tax reform Bill will be passed by Parliament in the Monsoon Session this year.

The GST law is much more than a mere tax reform and envisages a single national market in India, a dream that eluded even the framers of the Constitution. While the foundational document has provisions that promise freedom in inter-state commerce, in practice each state has pretty much behaved like an independent country when it comes to local taxes and their rates. More than locational advantages and availability of raw materials, it was the tax treatment of industries and companies that led to divergences in the economic destiny of different states. The desire to garner more revenue by imposing a variety of taxes hurt many. Much like competition between firms, rivalry among states is a healthy idea, but only when it has a desirable economic goal. Differential taxation does not fall in that beneficial class of goals.

Once the GST comes into force, much of that unevenness will start being ironed out. Note that the debate over the Bill—over many years—was largely about the process of transition. Many states that feared losing revenue were ultimately won over by promises of help and the delivery of handsome cheques (West Bengal is a good example).

What held up the Bill in the last two years was the Congress’ irrational behaviour. The party wanted a GST ceiling rate of 18 per cent specified in the Constitutional amendment related to the tax. It says a lot about India’s political and intellectual culture that such a demand— spelling out a tax rate in the Constitution—is even thought worthy of a debate.

The emerging consensus on the Bill—that brings around some bitter political rivals to a common position on a key economic policy—is a matter of some satisfaction. Since 2014, short-term political considerations had all but drowned any hope of economic rationality in the Indian system. The broad agreement on the Bill rekindles the hope that such collective rationality—an important factor for the long-run survival of any political system—has not been extinguished.

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