A Market, Unified
| Author | Arvind Subramanian |
| Pages | 40-41 |
40 FINANCE & DEVELOPMENT | June 2018
IN THE TRENCHES
PHOTO: STEPHEN JAFFE/IMF
A Market, Unified
Arvind Subramanian explains the
advantages of a new tax for India’s economy
and budget
AS CHIEF ECONOMIC ADVISOR to the government
of India starting in 2014, Arvind Subramanian
helped design the country’s goods and services
tax (GST). In July 2017, the nationwide GST
replaced the patchwork of value-added, sales, a nd
excise taxes levied by 29 states and the federal
government. e GST was introduced less tha n
a year after demonetiz ation, the government’s
controversial move to remove 86 percent of cur-
rency from circulat ion.
In this interview w ith F&D’s Chris Wellisz,
Subramanian, who previously ser ved as assistant
director of the IMF’s Research Depa rtment, dis-
cusses how the ta x created a single internal market
for the rst time since independence in 1947.
F&D: What were some of the obstacles to persua d-
ing state governments to support the tax ?
AS: One, of course, was t he loss of scal sovereignty.
Earlier they used to lev y these ta xes in various
forms, and they had complete freedom to do so.
And now it would all be jointly decided by the center
and the states. ey could a lso use tax incentives to
attract investment. For each state govern ment that
was very valuable —but for the country as a whole,
it led to a race to the bottom.
F&D:
Initially, you argued for a very simple struc ture
for the GST. You ended up with six rates, which
many economists say is not optimal because it is
more complex.
AS: In principle, everyone bought into the view
that it had to be simple. But… each state had
its own political compulsions. One state wa s a
producer of some good, and they would say, well,
charge that at a lower rate. Unfortun ately, politics
required that we had to depart from this simple
three-rate struc ture.
Once it was implemented, there was a high rate,
a 28 percent slab. People realized that was le ading
to a lot of evasion; it was too high, and the GST
Council—which is t he forum that deliberates on
this—t hen started paring down the 28 percent rate.
So progress was made. ere is sti ll some way to
go, and I’m hoping that over time simplicity will
be achieved.
F&D: Some signicant sectors, l ike petroleum and
real estate, are untouched by the GST. Do you
hope to include them at some point?
AS: I’m very hopeful that cert ainly electricity,
real estate, and pet roleum will at some stage be
brought in. But the way I think it is going to
work—and the nance mi nister has said this very
clearly—we’re still waiting for the whole GST
to stabilize. We’re not quite sure how buoyant
the revenue take will be, but once it is, all those
sectors can be brought in.
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