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India must switch to the goods and services tax (GST) regime
December, 08th 2010

Everybody in the political class agrees India must switch to the goods and services  tax (GST) regime. Or do they? Centre-state talks have been on for some time to fix GST's contours and modalities of implementation. Yet, as with most reform initiatives in India approaching launch date, petty politics seems to yet again play spoke in the wheel.

As it is, states have demanded unreasonable concessions - including on rate structure, central sales tax's continuance and exemption for many items from under GST's ambit - that threaten to distort the purpose of indirect tax rationalisation. BJP-run states seem to now have upped the ante on obstructionism. On Monday, their finance ministers skipped a key empowered committee meeting to discuss pending issues, including constitutional amendments mooted for GST's take-off.

While Asim Dasgupta, chairing the state finance ministers' panel, has tried to underplay the issue of poor attendance, other ministers present have reportedly said that GST has become prey to political brinkmanship. They have reason. If the BJP simply differed in view with the Centre on matters strictly economic, its representatives would be at the negotiating table.

By staying away entirely, the party can't but be seen as conflating inter-party dialogue on GST with the on-going parliamentary logjam on a 2G scam-related JPC probe. Projecting itself as broadly pro-reform as a party in power, the BJP's churlishness as main opposition party at the national level merely smacks of opportunism.

Nor have other non-Congress parties demonstrated too much keenness in pushing GST, so much so that keeping the April 2011 rollout deadline looks near impossible. We've seen collective foot-dragging even though GST's myriad benefits will accrue to the country as a whole, especially state dispensations given to complaining about resource scarcity.

It's rather belated to argue that states' fiscal autonomy is at risk. GST's point is to dismantle an inefficient system marked by maze-like complexity and non-transparency, with multiple taxes levied at the central and state levels. It needs Centre-state cooperation to deliver.

States must certainly be compensated for revenue loss in the post-launch span of adjustment. But blocking GST's debut suggests myopia, given the cascading gains for all stakeholders. Creating a seamless common market that trims transaction costs, GST will make business more profitable and competitive and tax evasion more difficult. Improving tax compliance, in turn, will boost state coffers, thereby reducing fiscal deficits and providing resources for social spending.

Removal of tax multiplication will mean consumer-friendly product pricing, benefiting aam aadmi. Finally, estimates suggest that India could see growth rise by 1.5 percentage points with GST operationalised, and the economy's size doubling pretty rapidly. Surely that's the big picture we ought to focus on.

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