Jitendra Prakesh / Reuters A Hindu holy man speaks with a street vendor in Allahabad, August 2017.

India's Tax Reform

The GST Is an Important, Limited First Step

“The greatest political venture since that originated in Philadelphia in 1787.” That is how the renowned American historian Granville Austin described the framing of India’s Constitution in his seminal 1966 book. Between 1946 and 1949, over 300 elected representatives of India’s 548 princely states met over 11 sessions under the auspices of a Constituent Assembly. Against a backdrop of grinding poverty, in a starkly diverse nation steeped in religious division and great feudal obduracy, they enshrined an “Idea of India,” elucidated in Sunil Khilnani’s 1999 book of that name. The idea was based on unity in diversity, in the country’s constitution, the world’s longest. The assembly was an attempt at striking a deft balance between India’s staggering religious, cultural, and linguistic diversity and the cherished desire for a unified nation. Defying all odds, the resulting constitution proved to be extraordinarily successful in building and fortifying the political Republic of India.

Seven decades later, India undertook a similar exercise—much smaller in size and scale, but perhaps as complex and influential as the original Constituent Assembly. Between September 2016 and June 2017, nearly one hundred representatives of India’s 36 states and territories met over 17 sessions under the auspices of the Goods and Services Tax Council to usher in a “one nation, one tax” regime. The result was India’s Goods and Services Tax (GST), an economic reform initiative to fortify the fiscal Republic of India. Like the Constituent Assembly of the 1940s, this attempt at fiscal unification comes against a difficult backdrop of stark and widening regional disparities—demographic, economic, social, and political. Although the GST is characterized as a one nation, one tax idea, today’s India is not truly one nation and the tax is not truly one tax.

ONE TAX?

Introduced on July 1, the GST is an attempt at unifying thousands of different tax rates for goods and services across India’s many subnational geographical units. Since its introduction in the Union Budget of 2006, the GST has waded through four different committees, missed Prime Minister Narendra Modi, who opposed the GST in 2013 as the then Chief Minister of Gujarat. Before the GST, India had a complex tax structure that included more than 1,000 tax rates across 32 states and territories for a basket of 1,700 goods and services. Often, the same good or service had different tax rates in different states. The GST has cut these down to just six rates—three percent, five percent, 12 percent, 18 percent, and 28 percent, plus zero percent for tax-exempt items. Rates depend on the type of good or service in question, with luxuries taxed more heavily than necessities: air-conditioned restaurants, for example, must pay the 18 percent rate, while non-air-conditioned ones pay only 12 percent. Although six rates may seem like an adulteration of the one-tax idea, this was an essential compromise given India’s complex and diverse political economy. And the GST is still a big leap forward—the same good or service is now taxed at the same rate across the entire country. The multiple categories, however, will ensure rent-seeking opportunities for tax officials, who will have the power to force (for example) an ice cream sandwich to be taxed at the higher rate for ice cream and not at the lower rate for a sandwich.

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