India’s tax reforms: Cutting the Gordian knot

India’s Goods and Services Tax (GST) Council will convene today to finalise the draft law for the country’s new unifying tax code. PM Narendra Modi aims to introduce the bill to Parliament in March and hopes for a rollout by midyear.

The country of 1.3 billion has long suffered from a miasma of tangled tax laws. A company wishing to do business in India must deal with around a dozen different central government taxes as well as 29 types of state levies. This deters foreign companies from setting up shop – the World Bank ranks India 157th out of 189 for tax simplicity. A firm often has to duplicate its supply chain in each state, causing costly trade distortions. The new GST will do away with this and radically alter the way business is done in India.

Some disruption will occur: supply chain restructuring and price negotiations will take a toll on certain companies. However, the tax unification scheme is predicted to eventually boost GDP growth by 1-2% per year. 

Not everyone is happy about the new tax though. Last month tax workers wore black armbands to work in a nationwide protest against the job losses the GST could cause. Unifying tax rates across India’s states will mean less paperwork for firms, which means less time spent by tax officials checking compliance, which in turn saves the government money. When the tax collectors are complaining that they have too little work, the government must be doing something right.