The goods and services tax has been long in coming. P Chidambaram promised it in his 2005 budget speech. He was preceded by the states, which began to change over to value added tax from 2003 onwards, and have fully gone over to it by now. Goods and services tax as envisaged in India would be a value added tax with a single rate all over the country. States introduced value added tax – that is, they started giving a manufacturer credit for tax paid by his suppliers on the inputs they sold to him. But each chose its own VAT rate; and they retained a welter of other taxes that they were collecting; so the crucial advantage of a goods and services tax, namely simplification, was never achieved. Finance ministers have come and gone at the centre; each finance minister has tried to persuade the states, and failed. So has Arun Jaitley, but he does not have to give up until he steps down. Every once in a while he promises the country that the goods and services tax is coming. His promised date now is the first of April next year; he may unveil it then – or promise its coming on a later date. He is not being exceptionally optimistic. His predecessors over the past decade also kept making the promise and breaking it. He has perhaps repeated the promise more times; and the more often he does, the less credible he looks. He either does not realize it or does not mind it; maybe he even believes his promise every time. Some people have an unshakeable belief in their own words, even it is not shared by others.
But it is not his pusillanimity that is postponing the introduction of the GST; it is the cussedness of the states. And why are they being cussed? One reason could be that the GST will replace all other indirect taxes; even if the GST is calibrated so as to give the same revenue as the sum of all those taxes, it will bring more revenue to some states and less to others. The finance minister has promised to take care of that, and to reimburse the difference to the losing states out of central revenue for some years. But he cannot do so forever without making a mockery of the reform; and states can keep asking him, “What after you stop?” More importantly, states will lose the power to vary indirect tax rates. Since they cannot levy income tax, they cannot vary it anyway. So GST will deprive states of most of their power of taxation. Is that a good thing? The practice in “good” countries is to make as few and infrequent changes in tax rates. The objective should be to forget tax changes and to learn to manage within the revenue. That is what the states should also learn to do if they are interested in good governance and in attracting investment from other states and countries.+
There is a more important source of the states’ resistance that is never mentioned – namely, the multitude of taxes levied just now are collected by a large tax force at many points – in factories, at city outposts, at interstate border crossings, and so on. They offer so many points at which bribes are collected; the tax collectors of states cannot bear the thought of these retail earnings ceasing. The primary advantage of the goods and services tax for taxpayers is also a crippling disadvantage to tax receivers; their interests conflict, and the tax collectors have won till now.+
Is GST worth bothering about then? It is, not simply because it will make business taxpayers’ lives easier, but because it will turn India into a single market. That is an odd thing to say, for the whole point of creating a country is that there are not movement, entry and exit barriers within it: that people, goods and services can move seamlessly across it. Unfortunately, India has never been a country in that sense. It emerged as a loose collection of presidencies and provinces as the British conquered it bit by bit. It remained fragmented under the British, and it has never been fully integrated 68 years after they left.+
Can it be integrated? Of course it can; but the economists’ arguments and bureaucrats’ file notings will not do it. It is the politicians who will have to do it; and there will always be many politicians who see no point in whipping junior tax officials into line. They will do it if they are themselves whipped into line by a strong leader. We are supposed to have one in our Prime Minister; this is a job worthy of his talents. Whether he has it in him, we just have to wait and see.