India: Will new tax save India from budget crisis?

India is edging closer to pushing through a value-added tax or goods and services tax (GST), as it is known here, that some are touting as "the single most important initiative in the fiscal history of India."

But edging closer doesn't necessarily mean actually passing legislation, suggests Bloomberg. After all, this is India.

"The implementation of the new system has been held up on many fronts: disputes over its precise shape, resistance on the part of some state governments because they fear a loss of revenue from the levy of state taxes, the need to amend the Constitution (which has a different view of taxation powers divided between the central government and the state than the one the GST envisages), and the absence of any concerted pressure from the citizenry," writes Chandrahas Choudhury.

And none of those problems has really disappeared — which is perhaps why last week's Business Standard reported that "the Parliamentary Standing on Committee on Finance may not be able to submit its report on the Good and Services Tax (GST) during the forthcoming Winter Session."

After postponing it three times, the central government now aims to introduce GST from April 1, 2013. Once implemented, it will subsume most of the indirect central and states taxes, duties and service taxes. It was to be introduced from April 2010.

Prime Minister Manmohan Singh's commitment to freezing the country's debt-to-GDP ratio at 5.3 percent this year, and slashing it significantly in the future, makes passing the GST virtually mandatory. And it could actually start some changes that would be politically popular.

"Not only would the implementation of the Goods and Services Tax increase government revenue, it would have a tonic effect on the battle against corruption, too, by simplifying a byzantine tax system and encouraging what economists call 'virtuous growth,'" Choudhury explains.

How so? By initiating a so-called "last-point retail tax," GST would eliminate a byzantine system of cascading taxes that India's state and federal governments attempt (in vain, often) to collect at every stage of the manufacturing process. That would eliminate at a stroke many opportunities for companies to pay the tax man, rather than pay the actual tax. 

But it would do much more than that, economists (including the PM) argue. It would make Indian manufacturing more competitive and make India an easier place to do business — which would in turn attract more foreign investment and speed the creation of much-needed factory jobs.