India Needs to Get Its New Tax Right

India’s long-awaited move to a genuine single market took a gigantic step forward on Wednesday when the lower house of Parliament passed a constitutional amendment that would make possible the introduction of a nationwide goods-and-services tax (GST) from April 2016. A single GST would replace the confusing plethora of taxes currently levied by central government in New Delhi and India's 29 states: excise duties, value-added taxes, even the odorous octroi -- a tax paid by truckers when crossing state borders. All this red tape is stifling -- a big part of the reason why some 60 percent of India's long-haul carriers are parked at any one time -- and often results in double taxation, resulting in onerously high indirect tax rates. Several experts suggest a well-designed GST would add as much as 2 percent annually to India’s GDP growth rate.

This being India, of course, there are reasons to be cautious. The government still needs to get the enabling legislation through the upper house of Parliament, which is dominated by the opposition Congress Party. Although Congress previously suggested it would support a GST, it's been emboldened by recent political victories and is now threatening to delay the bill for further examination and negotiation. Even if it passes, more than half of India’s states will have to ratify the legislation; only 11 of them are run by Prime Minister Narendra Modi's Bharatiya Janata Party.