While a candidate for President, Narendra Modi sold himself to the Indian people by promising to slash through the country’s miles of red tape, the so-called License Raj that strangles Indian business and gums up its commerce. Among the biggest obstacles to an efficient economy is the fact that India is in effect not a free trade zone; goods passing from one state to another are taxed, and trucks are stopped at the borders often for hours in order to be inspected and charged. Imagine if going from Virginia to Maryland was like going through customs at the Mexican border, except in slow motion.
That’s why Indian Finance Minister Arun Jaitley says doing away with state-by-state goods and services taxation would represent the country’s biggest economic reform since independence nearly 7 decades ago. Modi has made reforming this part of India’s economic policies one of his chief objectives. But as with other major reforms, he isn’t finding it as easy as he expected to get bills through Parliament. You’ve heard this story before. More than once, in fact.
As it turns out, getting a consensus of more than a billion people while keeping every veto-empowered special interest happy just ain’t easy, and the fight that’s ensued over the Goods and Services Tax bill (which will replace at least 14 federal and state taxes, according to the government) has kicked off an argument that recalls the early Federalist-Antifederalist fights in the young American republic. Because of all the resistance from the states, the government has compromised on the fundamental issue, free trade and movement of good within India itself, and now the businesses who called for the bill are getting cold feet. Reuters reports:
For years Indian businesses have lobbied for a nationwide sales tax, hoping to replace a chaotic structure that inflates costs and halts their trucks at state borders for duty payments, and to unify the country into one of the world’s largest single markets. […]
But to win support from states that fear losing revenue, the government has agreed to a 1 percent additional levy by states on the cross-border transport of goods, even on a company shipping products from one plant to another. The present system requires no such tax payments between plants. […]
India’s top business groups are now calling for a slowdown in the process as they try to roll back those compromises. […]
In a submission to the parliamentary panel reviewing the bill, the Confederation of Indian Industry, which has long lobbied for a national GST, suggested removing the provision for the interstate levy. It also urged that real estate, as well as alcohol and petroleum products, be brought under the new scheme.
Fights between prime ministers and parliaments on arcane matters of tax law may not be the most thrilling subject, even in one’s own country. But these issues demand our attention when it comes to Modi’s India. It will be the successes and failures of just these kinds of liberalizing economic reforms that will determine how bright the future of the world’s largest democracy will be.