Mansi Thapliyal / Reuters A tax office in New Delhi, April 5, 2013.

India's Taxing Tax System

Why the GST Is an Overdue but Welcome Overhaul

“India’s enormous market—a caged tiger—will now be unleashed,” said Anand Mahindra, chairman of the automobile manufacturer Mahindra & Mahindra Ltd., about the passage of a historic tax bill last week. At present, the country’s 29 states essentially dictate their own individual tax codes, a confounding system that has long tripped up inter-state commerce. But to the world’s surprise—not least India’s—this disorder could finally be coming to an end. After more than a decade of protracted negotiations, intense shuttle diplomacy, and close combat with vested interests, both houses of parliament unanimously passed the landmark Goods and Services Tax (GST) bill in a move analysts have called, “one of India’s most significant and ambitious reforms ever attempted.” At its core, the GST will replace a bevy of state and federal taxes with a single, unified tax on goods and services, bringing the country closer than ever before to a common market.  

A COMMON OPERATING SYSTEM

The journey to this momentous agreement began 25 years ago this summer. India’s economy was in shambles and the country was suffering a massive balance-of-payments crisis. Staring down the unthinkable prospect of bankruptcy, India adopted a sweeping set of market-friendly economic reforms that dismantled the “License Raj,” a suffocating thicket of licenses and regulations. Although many vestiges of this “Raj” remain, the reforms of the 1990s successfully ended the practice of industrial licensing, curbed the public sector’s role in the economy, opened India’s markets up to the world, and substantially unshackled India’s states from control by New Delhi, paving the way for them to shape their own economic destinies to a greater extent that ever before.

In this process, some Indians gained more than others. Inequality between—and within—states rose to new levels. Overall, in the quarter-century after the reforms, India experienced unprecedented rates of economic growth and lifted hundreds of millions out of extreme poverty. Private entrepreneurship took off, trade surged, and the first few chapters

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