When it comes to the benefits of tax reform, don’t look to the Trump administration’s new proposals (however worthy or unworthy they may be)…
Instead, turn your gaze 9,000 miles away…
That’s where a unified national goods and services tax (GST, for short) just became a parliamentary reality.
It sounds wonky, boring and easy to dismiss. But the new tax system promises to change nearly everything we’ve come to know and accept about India’s economy.
The winners are the Indian economy, the Indian people – and foreign investors…
India’s “Common Market”
Imagine what the modern-day U.S. economy might look like if South Carolina could levy a border tax on a load of Georgia peaches. Suppose New York had a duty tax on computers shipped in from California?
Such taxes were commonplace among the original 13 independent colonial governments.
But we have trouble even conceiving the idea in our current economy because of Section 9 of the U.S. Constitution: “No Tax or Duty shall be laid on Articles exported from any State.”
Until now, India’s tax structure looked much the same as America’s did 200-plus years ago – a patchwork of taxes, surcharges and fees levied by its 32 state governments and the national government in New Delhi.
The result? Higher costs and confusion, for one.
- A rice grower in the Indian state of Chhattisgarh might pay multiple levies for a new tractor as it’s shipped from a factory in the state of Gujarat, less than 900 miles away.
- And how do you calculate the taxation on software coded by programmers in Uttar Pradesh (the Silicon Valley of India), packaged in another state and then purchased by a business in New Delhi?
According to India’s Economic Times, the old system of indirect state levies pushed up costs to Indian consumers and businesses by 20 to 30%.
It also slowed down the speed of India’s economy.
For instance, the average freight truck in India travels a paltry 280 kilometers (173 miles) a day, versus 800 miles a day in the United States. Partly, the low distance is because of India’s lack of investment in its road network until recent years.
But experts say it’s also because an Indian freight truck must stop at each state border so local tax authorities can inspect the goods and collect duties.
The new tax sweeps all those “indirect” tax levies away, promising a revved-up Indian economy that may put China’s glory days of economic growth to shame by comparison.
“Made in India”
Analysts at HSBC believe the unified goods and services tax will add at least one full percentage point to the country’s yearly economic growth (which has already surpassed China’s as the fastest growing in the world at a 7.6% annual clip in 2015).
As goods move more freely across the country, it might raise annual gross domestic product growth by as much as 1.7% a year, according to India’s National Council of Applied Economic Research.
Our own Federal Reserve, according to a recent research note, expects that the new tax might accelerate India’s annual economic growth by as much as 4%!
That’s one reason why a German freight shipment and logistics company, recently said it will invest $268 million in India in the next three years.
CEO Frank Appel told reporters the company will consolidate its distribution centers around the country, upgrade its airport operations and optimize its logistics network to take advantage of the new, simpler tax structure.
And things are just getting started. As Appel noted, more manufacturers will emerge in India as they realize they don’t have to worry about onerous, confusing tax provisions any longer. “The Goods and Services Tax is a very robust step in realizing [the appeal of having products] ‘Made in India.'”