In the shrill black money debate, how does one square up the enthusiasm of parties screaming for disclosure with the equal zeal to resist the introduction of the goods and services tax (GST)? This tax is the most powerful weapon we can unleash to make black money visible in the economy, especially in the real estate sector. The introduction of the tax is scheduled for April 1, 2012, a deadline agreed upon in principle by all states with the Centre. But with the states run by the BJP and its allies pulling away from the rest, the prospect is very dim now. On Tuesday, as FE reported, several of these states repeated their misgivings on the switchover to a new tax system for indirect tax. Yet a loss of momentum to introduce the most important tax reform for India will be very costly for the economy, and not just to track black money. The GST, once introduced, would spur labour-intensive manufacturing, even export-oriented ones, particularly in the poorer regions of India. This is because the tax would eliminate all others, leaving no reason for companies to produce where costs are high, like near cities or densely industrialised areas. Instead, they would pick areas with surplus labour, essentially our poorer states. The other major benefit from the tax would be making our exports competitive as there will be full tax refund for imports, instead of instruments like duty drawbacks. Cavilling at this opportunity for the sake of political battles would create substantive losses. The tax plan seeks to replace the array of central and state level taxes on goods and services with two common rates for all goods (one for the states and one for the Centre), and similarly for services. So, after the changes are introduced, there would be a pan-Indian rate of tax on production. The only additional tax would be on property at the sub-national level and income tax at the national level.
A study done by National Council for Applied Economic Research has quantified the benefits of GST. It has estimated that India could immediately add $0.5 trillion to its GDP of about $2 trillion that it will log in 2011-12. These are massive changes. It is, in fact, fair to say that the current UPA government can consider itself largely successful if it can just carry this piece of reform through the legislature. One of the best ways to achieve this is to offer, as Vijay Kelkar has suggested, a grand bargain to the states. This could be an offer to let them tax all services instead of the Centre, in exchange for letting go of all other discretionary taxes.
