Why It Matters

Modi scores with GST

Indian Prime Minister Narendra Modi named the goods and services tax, implemented last Saturday, the "good and simple tax".

Yet, India's GST is not all that simple. Unlike Singapore's single tax rate, India has four tax bands, from 5 per cent to 28 per cent, with big revenue earners like alcohol kept out of the GST. The filing of multiple returns, from monthly to yearly, has unsettled even bigger businesses.

Still, the GST is the biggest tax reform since India gained independence from Britain on Aug 15, 1947, and marks a major political victory for Mr Modi. It was something his predecessor Manmohan Singh, regarded as a renowned economist, had failed to push through.

Among other things, GST subsumes nearly a dozen taxes, and checkposts collecting tax at state borders - often leading to long delays in the movement of goods - are already a thing of the past.

Provisions, like businesses needing a tax number to claim credit on input costs, make it tougher for firms to stay out of the GST system. What this means is that compliance will go up in a country where traders and consumers are quite happy to avoid paying taxes, and corruption is expected to come down.

Though the GST's real impact will likely take time to register on the economy, the reform comes at a much needed time for India, whose economic growth slipped behind China's in the first quarter of the year. Foreign investors were also wondering how deep Mr Modi's reforms agenda ran and whether he could cut India's notoriously lengthy bureaucratic procedures. The government has pledged to ensure that the GST gets simpler down the line.

The GST is a bright spot for Mr Modi, who has to contend with farmers' discontent and an upsurge of Hindu nationalist violence. For his Bharatiya Janata Party, it is counting on the GST, as India heads to elections in 2019, as a tangible reform to show for its governance.

A version of this article appeared in the print edition of The Straits Times on July 04, 2017, with the headline 'Modi scores with GST'. Print Edition | Subscribe