“A historic day for all of us” is how Union finance minister Arun Jaitley described the passage of the goods and services tax (GST) Bill in the Lok Sabha on 29 March. “One nation, one tax” is the Union government’s slogan for GST. The implication is that uniform tax rates across all states of India will serve as a unifying force of efficiency. Replacing several hundreds of different tax rates across the 29 states of India with just five tax slabs for all goods and services will reduce friction in the movement of goods and services across state borders. This can boost economic activity and contribute substantially to gross domestic product (GDP) growth. For these reasons, the GST initiative has been justifiably acclaimed as a milestone economic reform in independent India. But there are reasons to be cautious.
GST aims to forge an economic union of India at a time when the economic disparity among the various states of India is at its peak. For the sake of “one nation, one tax”, states have sacrificed their fiscal rights. Such economic disparity combined with India’s unique political diversity renders the GST regime vulnerable to fractious demands.
India is currently experiencing a 3-3-3 paradox—the three richest states are three times richer than the three poorest states. This level of regional inequality is the highest in independent India’s history. Four states (Gujarat, Maharashtra, Tamil Nadu and Karnataka) account for as much inter-state trade as the other 25 states combined. One-fifth of all passenger cars and two-wheelers are sold in just two states—Maharashtra and Tamil Nadu. The average Tamilian earns Rs1.4 lakh per year, four times more than the average Bihari’s annual income of Rs35,000."
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