India's GST could lead to chaos, but then be a game changer

TODAY, India introduces a goods and services tax (GST) in what is billed as its greatest tax reform since independence. But a closer look suggests that this has the potential makings of a transformational idea on paper botched in practice. The tax, as designed, will be so complex to administer that it could create endless headaches for business and tax authorities alike - and for India's courts.

Why a GST for India is a good idea - at least on paper - is a no-brainer. First, it involves simplification on a huge scale. The GST will replace a plethora of some 17 indirect taxes, including excise taxes on manufactures, a service tax, a value added tax, central and local sales taxes, octroi - which is a tax levied on goods entering one state from another; a luxury tax, an entertainment tax and a variety of state and local cesses and surcharges. There were also different tax rates for different states. This bewildering structure - which also spawned corruption and evasion - partly explains why India's tax collection has been inefficient even by emerging market standards. This will change with the GST.

Second, the GST provides for input tax credits, which will help resolve the problem of tax cascading - that is, taxes on taxes. This would lead to more competitively priced goods and services.