India's GST could be transformational - teething problems notwithstanding

ON July 1, India will replace a panoply of some 17 taxes and duties with a single goods and services tax (GST), which could turn out to be the country's most significant tax reform since independence.

India's GST has been about 10 years in the making, during which it has been something of a political football, fiercely debated, blocked by opposition parties, resisted by states and vested interests, but doggedly pushed by successive ruling governments. At last, it will become a reality and it holds out the promise of transforming India's economy.

As it is now, the economy is in many ways fragmented. Individual states levy their own entry taxes - called octroi - on goods from other states, which makes India less of a common market than even the European Union. Within states, there are a variety of different taxes and duties, and tax collection is often marred by corruption and evasion. As a result, tax revenues at around 17 per cent of GDP are at least four percentage points lower than the average for emerging economies and India has faced chronic fiscal problems - which in turn has constrained much-needed government spending for development.