Prime Minister Narendra Modi's government deserves accolade for joining the political alliance needed to pass such a complicated reform, getting the nod from a two-thirds majority in both Houses of Parliament and 50 percent of state assemblies. However, the government may now be undermining its own victory. News emerged last week that the new council of central and state finance ministers empowered to administer the tax, decided on a GST with four levels and numerous exemptions.
This is even worse than it sounds apart from one thing; many goods will remain tax-free, which actually adds another level with additional surcharges and cesses on certain kinds of goods. Altogether, the number of rates may end up being closer to seven or eight, which is not exactly the sort of simplicity that the #GST promised to bring to paying taxes in India.
The GST was supposed to be smooth: a single rate, with no exemptions and a single tax form. That would allow companies to know exactly, what they needed to pay and setting-off input costs without excessive paperwork. Actually, it is not clear whether the new GST will in fact reduce paperwork; it may even increase the number of forms that companies will have to submit.
The government is losing the opportunity to accelerate Indian productivity and growth. The answer goes to the Modi government's failure on economic policy-making. Our Prime Minister has now expelled all kinds of domain experts required to frame complex reforms of this sort. Instead, he has relied extensively on bureaucrats.
The finance Ministry has made a mess of the GST; which reveals exactly why this is dangerous. For Delhi's bureaucrats, more control is always a good thing. Note what the multiple-rate GST means: Private companies have an incentive to go to Capital and press for their products to shift to a lower tax slab.
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