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Why India urgently needs a GST tax structure
March 22, 2015, 2:30 pm

The legal and regulatory framework governing a free-market economy differs considerably from that of state-controlled markets. Basically, under government control, economic activity is confined to only those permitted by the state; in a free-market economy, the state steps-in only when corrective measures are needed to prevent a ‘market-failure’ or potential market-breakdown.

India requires the legal and regulatory frameworks for a market economy, which involves among others the repealing of old legacy laws and creating state capacity to address market failures. Among the reforms that the government needs to concentrate on are: First, ensure low inflation by putting in place a structure for monetary policy, fiscal consolidation and food market reforms.  It must also put public finances on a sustainable path through tax reforms that require urgent implementation of a Goods and Services Tax (GST) as well as introduction of a more predictable tax administration. Also of importance in the implementation of expenditure reforms that focus on public goods, new designs for subsidy programs and stricter mechanisms for accountability.

In order for the Indian prime minister’s call for “Make in India” to resonate with international business community, the country needs to put in frameworks that create a business-friendly environment, including changing the government’s intervention in the market from one of permitted until prohibited, to one of prohibited unless permitted.

Providing an environment conducive for investment, which is crucial for job creation and economic growth, requires a commitment to improving India’s long-term growth prospects. One component in this approach is the GST, which the government now says will be rolled out in April 2016. The GST envisages creating a single tax for goods and services across the country.

For instance, Indian truck drivers, who clock an average of 280km per day, are well below their international counterparts who clock on average 400km per day, and far below American truck drivers who cover over 700km per day. The underperformance of Indian truckers has less to do with bad roads and less fancy trucks and more about prevailing archaic laws. With more than 650 check posts in the country and 11 categories of taxes on the road transport sector, truck drivers in India spend 60 percent of their time off-road pushing paper-work and negotiating check posts.

Since road traffic accounts for 60 percent of freight traffic in India, the slow movement of trucks across states leads to productivity loss. According to a study by UBS Securities, the global firm providing financial services, if the distance covered goes up by 20 percent per day, Indian truck productivity would improve by 12 percent. Higher productivity would streamline the supply chain, including cutting the need for buffer stocks, reducing loss of perishable goods and lessen, the need for many warehouses.

Analysts say the implementation of the Goods and Services Tax (GST) could provide the kind of productivity boost illustrated above. GST aims to combine the large number of taxes currently imposed by the central and state governments into a single tax, which could help create a common Indian market facilitating seamless movement of goods across states and reducing the transaction cost of businesses.

According to the National Council of Applied Economic Research, government's tax revenue will increase by about 0.2 percent because of GST implementation, while GDP growth could go up by 0.9-1.7 percent. Exports will also get a boost as they are zero-rated for taxes and also because the fall in cost of manufactured goods and services under GST will increase the competitiveness of Indian goods and services in the international market.

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