18 Sep 09 Uniformity in Diversity: The tale of Indian GST

During the budget speech (for FY10), the Indian Finance Minister Mr. Pranab Mukherjee, announced that India would move towards a uniform GST (goods and services tax) structure by April 2010. The benefits of such a system are many, proven elsewhere, and enumerated by numerous analysts and experts, and I will not repeat all this.

Yesterday, we learned that a meeting of state finance ministers had finally reached some kind of agreement. The media reaction has been mixed, with (valid) criticism about the two-tier structure, a third rate for precious metals and substantial powers to individual states to exempt “essential” commodities. The Mint has (rightly) argued that differential rates will lead to unnecessary litigation around product classification. The Economic Times has praised the move as “a significant movement forward”, arguing that while a single rate (for all products and commodities) is the best option, a two-tier structure is far better than one with multiple rates.

I think everyone is agreed that a single rate is the optimal option, and equally, that this is “politically difficult”. No doubt the political difficulty is often used as an excuse for inaction, but when thirty-odd states ruled by a motley variety of political parties have to arrive at a consensus, even the simplest of decisions is likely to be difficult.

Interestingly, we always blame politicians for playing politics and thereby distorting legislation by creating exceptions for favoured groups. There is merit in such arguments, no doubt. However, how do you explain the CII lobbying for zero GST on processed food, as reported in the Business Standard? I agree the that processed food industry is one with huge growth and poverty reduction potential, and therefore critical. However, every lobby and political group thinks their claims are critical, and therefore merit exemption! Where does this end?

The point here is that once we allow for exemptions, then we create windows for arbitrariness and the dispensing of favours. If even one cause is deemed important enough, then others will be so deemed tomorrow. And then obviously the benefits of simplicity and clarity (which is why we want a “uniform” GST) are lost.

Having said all this however, I must acknowledge that the latest attempts at a uniform GST may fall short of the ideal, but come with several positives. Firstly, the fact that the Finance Minister set a target date (April 2010) is in itself significant in a polity where commitments are generally open-ended. Second, the fact that the States have agreed on something (even if it is a halfway point) is an achievement in itself.

Ultimately, it all depends on how you look at the glass – half full or half empty?