Senior fellows at IDFC Institute, Vivek Dehejia and Praveen Chakravarty, write about why GST is likely to exacerbate the issue of income divergence between Indian states, which was recently raised in the Economic Survey and was addressed in their Briefing Paper.
"In a GST regime, the ability of poorer Uttar Pradesh to wean Apple away from richer Karnataka using tax tools is even more diminished. To be sure, there are various other factors of governance, law and order, land and labour costs that will influence Apple’s choice of state. Perhaps states can still circumvent the GST spirit of one market one tax by offering cashbacks in lieu of GST as incentives to companies.
Whichever way one expects this to play out, it is indubitably clear that with GST, Uttar Pradesh is in no better a position to attract Apple vis-à-vis Karnataka than it is without GST. So, GST at best will not have an impact on the current disturbing trend of income divergence of states or at worst will exacerbate it by removing a powerful fiscal tool of states."
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