GST: More the Rates, More the Exemption and More the Exceptions

What’s going on? Why is the government frittering away the opportunity to vastly boost Indian productivity and growth? The answer goes to the heart of the Modi government’s failure on economic policy-making. By and large, the Prime Minister has shut out the kind of domain experts who are needed to frame complex reforms of this sort. Instead, he has relied extensively on bureaucrats.

The mess the Finance Ministry has made of the GST reveals exactly why this is dangerous. For Delhi’s bureaucrats, more control is always a good thing. And note what the multiple-rate GST means: Private companies have an incentive to go to New Delhi and press for their products to be shifted to a lower tax slab. It’s an “open invitation to producers’ and traders’ associations” to lobby.

The powerful automobile manufacturer lobby, for example, must be girding its loins to do battle in the capital’s corridors of power: Small cars are to be taxed at 28 percent and not 18 percent, and SUVs a couple of percentage points higher.

Chief Economic Adviser produced a report earlier this year arguing for two rates, with a maximum rate of 18 percent. That’s close to the worldwide best practice. New Zealand, for example, introduced a GST with a single rate in 1986 that’s changed only twice since; Canada introduced a GST in 1990 and then didn’t touch it for 15 years.

It’s still possible that, over time, the government will realize its mistake and cut down the number of exemptions, the number of different rates and the amount of paperwork required. That will require India’s elected politicians, in both New Delhi and state capitals, to look carefully at the data, be nimble and ignore the protestations of their bureaucrats. The alternative is that the GST will simply not make enough of a difference to India’s absurdly complex tax system to shift the country’s growth trajectory. It would be - a “name changer, rather than a game-changer.”