Breaking Down India’s Internal Barriers

NEW DELHI – Of the many economic reforms crying out for immediate implementation in India, the most obvious is the long-pending Goods and Services Tax. So why have India’s politicians failed to enact it?

The need for a GST is virtually indisputable. As the billionaire Steve Forbes recently wrote in his eponymous magazine, “Outsiders are amazed that much of India resembles pre-revolutionary France, with many internal barriers standing in the way of economic efficiency and growth.” He then pointed out that a GST is critical to enabling India, like the United States, to reap the benefits of its continent-size domestic market, as it would replace the “stifling hodgepodge of local taxes” that amount to “internal tariffs on the movement of goods.”

Indeed, India has a bewildering array of subnational taxes. For example, taxes on commerce among India’s states require checkpoints at their borders, with long queues of trucks awaiting clearance. As a result, shipping freight across the country is a logistical nightmare. Sales taxes vary, and are augmented by “octroi” taxes on cross-border shipments of goods destined for local consumption. Whereas the European Union is 28 sovereign countries with one common market, the Indian Union is one sovereign country with 29 separate markets.

Making matters worse, India’s multiple taxes and tax authorities create more opportunities for corruption and tax-avoidance. A national GST would eliminate these problems. For businesses, particularly those that have to transport goods across the country, the GST would be a boon. It is estimated that the GST’s passage would add 1-2% to India’s GDP instantly.