Making the Most of India's Big Tax Reform

(Bloomberg View) -- Given the usual speed of economic reform in India, it's remarkable that the biggest change in years might actually start on schedule. “Start,” though, is the operative word.

If the country's new national goods-and-services tax does go into effect in July, which looks more likely now that Parliament has passed the requisite legislation, that will be worth celebrating. The GST will greatly improve a fractured tax system and help create an integrated Indian market. But to make the most of this bold innovation, the government has a lot more work to do.

Under the current tax system, different states impose separate levies as goods move across the country. Truckers spend hours idling at internal borders, filling out forms and awaiting inspection. Small and medium-sized companies prefer not to grow rather than have to deal with the administrative burden of becoming national enterprises. Compared to this mess, even a less-than-perfect GST would be an improvement.

Unfortunately, the GST in prospect is further from perfect than the government had hoped. Delhi needs the support of individual states to implement the new tax. To gain it, officials have settled on a complex structure with at least four different brackets (five if you include zero-rated staples), as well as an additional levy on sin and luxury goods.

Resorting to multiple rates sacrifices some of the GST's economic benefit. It would have been better to follow the example of many other countries around the world, which collect a tax of the same kind -- a so-called value-added tax -- using a single rate applied to a virtually all goods.

The added complications will weigh especially heavily on India. They'll be gamed by firms and consumers used to navigating bureaucratic mazes. That will make it harder, in turn, to thin the bureaucrats' teeming ranks, which ought to have been a high priority. The burden of compliance will be lightened, but less than it could have been.

So once the GST is in place, the government should keep working toward its original goal of having only one or two rates, with as few exemptions and as little paperwork as possible. To make the reform stick, and to build support for other initiatives, India needs to see the benefits of the GST as clearly and as quickly as possible. A simpler system would yield better results in short order, and serve over time as a more powerful spur to economic growth.

Still, give the government credit. The new GST, imperfect as it may be, will be a great step forward for India.

-- Editors: Nisid Hajari, Clive Crook.

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.