It took more than a decade to get there but India’s parliament finally approved a long-awaited bill in August 2016, creating a nationwide goods and services tax (GST) — arguably the most important tax reform ever achieved in post-colonial India.
The shift to a consumption tax will be a boon to those who bemoan unnecessary bureaucracy in India. It removes cumbersome and price-distorting layers of double taxes and, in the long-run, should bring down prices for consumers.
The improvement is clear. Take car sales as an example. Before the introduction of GST, car sales were subject to six different levies at various rates, depending on the engine size and length of the vehicle. With the passing of GST, car sales are subject to a single tax rate.
Finance Minister Arun Jaitley, who should get much of the credit for the simplified tax system, said last year that it would turn India into a “uniform market”.
The move is a stellar achievement for both Jaitley and Prime Minister Narendra Modi, but it does come at a time when India’s government has been accused of serious missteps. Still, Jaitley's crowning achievement is enough to earn him the runner-up spot in FinanceAsia's Finance Minister of the Year study — the same spot he held last year.
The country’s demonetisation programme, in particular, has been widely derided. India’s government launched a campaign to remove 86% of the country’s bank notes in November. Although the motivation appeared sound —tackling corruption, removing forged notes, and boosting bank deposits — the execution was sloppy.
The move was good news for India’s banks. Deutsche Bank thinks around half of the demonetised cash will remain as bank deposits in the system for the long term, increasing banks’ pre-tax profits by up to 15%.
But the wider economy could suffer. Consumer spending and property sales are expected to slow down in the short term as consumers rein in spending and corporations struggle to pay their employees without having the correct bank notes on hand.
It is unclear how much of the blame for the demonetisation programme should fall at Jaitley’s door. But given the importance of the plan for India’s economy, he perhaps should have been more vocal about the potential downsides.
In the long-term, however, the impact of demonetisation will undoubtedly be overshadowed by the introduction of the GST, a move that looks set to become the crowning achievement of Arun Jaitley’s tenure as India’s finance minister.
We are releasing the results of our Finance Minister of the Year study day by day. Tomorrow we conclude with the announcement of our winner.
