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The main roadblock to an Indian common market? Democracy

The lack of a national goods and services tax is stopping India making the most of its continent-size domestic market. The government is keen, but local politics is holding it back

Trucks at a toll tax collection point on the Delhi-Haryana border. The GST was meant to turn India into a common market, but the revisions that have been made to it mean such tollbooths are likely to remain

Of the many economic reforms crying out for immediate implementation in India, the most obvious is the long-pending Goods and Services Tax (GST). So why have India’s politicians failed to enact it?

The need for a GST is virtually indisputable. As the billionaire Steve Forbes recently wrote in his eponymous magazine: “Outsiders are amazed that much of India resembles pre-revolutionary France, with many internal barriers standing in the way of economic efficiency and growth.” He then pointed out that a GST is critical to enabling India, like the United States, to reap the benefits of its continent-size domestic market, as it would replace the “stifling hodgepodge of local taxes” that amount to “internal tariffs on the movement of goods”.

It is estimated that the Goods and Services Tax’s passage would add one to two percent to India’s GDP instantly

Indeed, India has a bewildering array of subnational taxes. For example, taxes on commerce among India’s states require checkpoints at their borders, with long queues of trucks awaiting clearance. As a result, shipping freight across the country is a logistical nightmare. Sales taxes vary, and are augmented by “octroi” taxes on cross-border shipments of goods destined for local consumption. Whereas the European Union is 28 sovereign countries with one common market, the Indian Union is one sovereign country with 29 separate markets.

Making matters worse, India’s multiple taxes and tax authorities create more opportunities for corruption and tax-avoidance. A national GST would eliminate these problems. For businesses, particularly those that have to transport goods across the country, the GST would be a boon. It is estimated that the GST’s passage would add one to two percent to India’s GDP instantly.

Petty politics
So what is holding up the GST’s implementation? In short, politics.

The GST was first introduced seven years ago by the Congress-led government in power at the time. But it was delayed because of the fierce opposition of Narendra Modi, then-Chief Minister of the western state of Gujarat.

When Modi became Prime Minister two years ago, he and his Bharatiya Janata Party (BJP) suddenly recognised the virtues of a GST, embracing the bill with great fanfare, but also with important amendments. Pandering to BJP governments in Gujarat and Maharashtra, which claimed that, as “producer” states, they would lose out from a GST, Modi revised the bill to grant states the right to levy an additional one percent tax on outgoing goods. And yet the bill already provides for states to be compensated for five years for any loss of revenue from the application of GST.

The change – a breath-taking act of petty politics – controverts the very spirit and intent of the GST. If states were levying individual taxes on top of the GST, the national market would again be divided and distorted, with checkpoints returning on state frontiers to assess the value of the goods on their way out. In short, India would be back to square one.

It gets worse. In another act of political appeasement, the BJP government has introduced a number of exemptions. By omitting alcohol, tobacco, petroleum products and electricity – which together account for more than a quarter of all tax receipts – the government is significantly diluting the GST’s potential impact on the national economy.

Moreover, the BJP government has increased so many other taxes (which it simply should have eliminated) that the National Institute of Public Finance and Policy estimates that the GST would have to amount to as much as 27 percent to prevent revenue loss. Far from reviving the economy, such a rate would cripple it. Overall, the current government’s gutted version of the GST would, by some estimates, have no measurable effect on GDP at all.

Congressional resistance
The Congress party, now in opposition, refuses to support the adoption of the GST bill until the more effective version is restored. It wants to abolish the extra one percent tax levied by the states and bring all kinds of goods within the GST’s ambit. In order to reduce incentives for avoidance and thus augment revenues, Congress also wants to cap the GST at 18 percent. And, to ensure fairness, it seeks the restoration of the GST Disputes Settlement Authority provided for in the original bill, so that the GST council administering the tax would not rule on its own decisions. There are a few more minor objections, but these are the core issues holding up the adoption of the GST.

These kinds of problems do not arise in top-down autocracies

Instead of addressing these legitimate problems, Modi is accusing Congress of unconstructive opposition by thwarting reforms that it had once advocated. But Congress will not back down, insisting that it will not allow the bill to pass through the upper house of parliament, where the BJP does not have a majority, until the government accepts the key amendments. The resulting stalemate means that Modi’s plan to roll out the new tax at the start of the next fiscal year, on April 1, 2016, is probably dead in the water.

Some will see in this contretemps proof of the age-old argument that India’s democracy is an obstacle to development. After all, it was democracy – specifically, the pressure to maintain adequate support – that led the Modi government to hollow out the GST concept. And it is democracy – that is, the need to secure adequate support for the bill in parliament – that is enabling Congress to block any further progress until Modi relents. These kinds of problems do not arise in top-down autocracies like China and Singapore.

Nonetheless, India is right to organise itself this way. Its system of governance rests on the belief that an integrated process of bargaining, disagreement, reflection and compromise – not top-down unchallenged decision-making – is the most effective route to wise, fair and successful policymaking.

The GST bill that eventually emerges from this standoff will be better for having gone through these detailed, if time-consuming, debates. When it is finally adopted, the chances that it will transform the Indian economy for the better are high.

Shashi Tharoor is a former UN Under-Secretary General