India is set to implement the goods and services tax (GST) on July 1 to replace a bunch of state and federal levies in what is being called the biggest tax reform since independence.
The best way to understand the grand federal bargain is to consider it a victory of immediate political concerns over potential economic gains that could have been possible in the future. In other words, political optics have overpowered economic logic.
The tax rates that have been approved by the finance ministers in the GST Council are clearly a reflection of three political economy concerns. First, the impact of the new tax regime on the prices citizens will pay. Second, the impact on government budgets through changes in tax collections. Third, maintaining an element of progressivity on what is essentially a regressive tax, as all indirect taxes are. The overarching goals of the negotiations thus seem to have been to ensure that the inflationary impact is minimal, government revenue is protected, and the new tax system explicitly appears to be pro-poor.
The problem is that these dominant political economy concerns have led to a complicated tax structure with multiple rates, exemptions and even cesses-a far cry from the clean goods and services tax that had been proposed initially more than a decade ago. The multiple rates on services are beyond belief. Fears of a flawed GST structure have now been confirmed.
