The kicks and starts of the goods and services tax (GST) have dominated headlines recently. Despite political heel-dragging at the state level, a consensus has formed that GST is imperative to finally create a single, unified Indian market. This has left a broader, lingering question: How will GST actually be implemented, especially as the Centre will have to bring together a seemingly impossible coalition of states to amend the Constitution?
GST is an opportunity to move India beyond a federated collection of independent states wrestling with each other’s independent economies to a unified economic powerhouse.
Illustration: Jayachandran / Mint
For political implementation, compromise will be necessary. The most pressing concern is to get all the states on board. The National Democratic Alliance pieced together a coalition of states behind the value-added tax a decade ago. This time, amending the Constitution to place more tax-levying powers in the Centre will be a feat requiring even greater political mastery.
It cannot be taken for granted that it is in several states’ individual interests to oppose GST. As a consumption-based tax, it will undoubtedly cause underdeveloped states such as Madhya Pradesh and Chhattisgarh to lose out on revenue in the short run.
The subsequent political gridlock is bad news. In a recent speech, whose excerpts this newspaper carried on Wednesday, chairman of the 13th Finance Commission Vijay Kelkar said the panel may be willing to recommend compensation to states to ensure that revenue levels are maintained.
Compensation to certain states, as Kelkar suggests, is a precarious issue. Political standstill must be avoided to actually implement GST, so some compromise will have to occur. Short-term compensation for states to prop up revenue to existing levels—and only existing levels—will indeed make GST politically viable. But this should be a policy for transition—not a permanent milk bottle.
Finally, there have been recent discussions about the merits of a dual GST versus a single GST. The greatest benefit of GST is that it will lower compliance costs for business and end the seemingly arbitrary gerrymandering that occurs as companies jump around complicated state-level tax issues. This is why a single GST must be pursued.
Critics of a single GST complain that India is deeply federated and such a tax move will upset this ideological underpinning. They also say it is a myth that a single GST will have greater tax revenue than a dual system. The latter point is a side issue. India is indeed deeply federated, but a dual GST will only perpetuate that. GST is an opportunity to finally unify India’s economy. It should no longer be an aggregate of independent states; with a single GST, India can finally be a single, unified country.
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