Money Matters

India’s sales levy reveals some taxing problems

June 19, 2017
By Web Desk

Implementing a national sales tax, with all its political and technical problems, is always likely to be a difficult endeavour. It is particularly so in an emerging market country of 1.3bn people and regional economies in wildly different stages of sophistication - and a tradition of intense lobbying for special favours for particular groups.

Given those constraints, it is remarkable that in a few weeks India, just three months from passing the legislation, will have put its goods and services tax (GST) into place. The tax should help to ease commerce between the states, which had previously been hampered by a patchwork of different regimes. But while the process of setting rates has been commendably open and transparent, the speed with which it has been done has left a lot more complexity in the system than had originally been hoped for.

The advantage of a national sales or consumption tax in India is clear. The existing system of income and excise levies varies hugely by state and is subject to corruption and abuse.

Still, an acute awareness of the effect of price changes on household incomes in India, particularly for basic goods, together with states’ jealousy of their independence, have been a serious obstacle to introducing a national tax. As with other countries - changes in the coverage of the UK’s value added tax regime are an annual Budget minefield - there has been fierce lobbying over which product falls under which of the five rates, ranging from zero to 28 per cent.

Narendra Modi’s government has been commendably open about this process, as even some of his political opponents admit. But his determination to have the system in place by the Diwali festival in October, traditionally a time of heavy consumption, means that decision-making has been rushed.

Other countries that have introduced national sales taxes, such as Australia, took a year or more between legislation and implementation. In India, in many cases officials gave way to lobbying from state governments for low rates on particular products. They ended up making up the difference by jacking up taxes on goods with no politically powerful champions.

Some of the results are peculiar. Washing detergent and paint, for example, together with board games such as chess and Monopoly, have been deemed luxuries worthy of the highest rate. The government was forced to backtrack on its original proposals for taxes on energy sources, which would have taxed solar panels more highly than coal. As for services, the GST has complicated rather than simplified matters. A single nationwide services tax was already in existence, and will be replaced by a complex system of varying rates.

The general principle of the GST is a good one, and it is right to implement it. But even Mr Modi’s self-styled reforming government cannot disinvest the fragmented nature of Indian politics, with its short-term focus on delivering government handouts or exceptions to favoured groups. Nor can it wish into existence a speedy and efficient bureaucracy to take so many decisions in such a short time.

Complaints about the redistributive effects and apparently arbitrary coverage of sales taxes are hardly new. Australia’s version was a heated subject of political argument years after its introduction, including point-scoring over the minutiae of what products were subject to what rates. India will no doubt have to return to the design of the GST in years to come, and will not find it an easy process. But Mr Modi’s government deserves credit for pushing the project through at all.