India’s goods and services tax (GST) was meant to help organizations file a single indirect tax return rather than multiple tax returns at the central, state and local levels. GST had been under consideration since the late 2000s under late Prime Minister Manmohan Singh, of the Indian National Congress (INC) party, but the center and states could not agree on sharing revenue. Thus, it remained only on paper for over a decade. However, the government of Prime Minister Narendra Modi, of the Bharatiya Janata Party (BJP), finally implemented it on July 1, 2017. While the reform was trailblazing and laudable, like many other so-called reforms in India, it has left much to be desired.

What’s wrong with GST?

Initially, there were many hiccups. The reform provided for electronic filing of returns, but because of a hasty rollout, it was not adequately tested before being opened to the general public. The extreme load on the system led to many crashes, which continued for more than a year. The BJP evidently wanted to win quick political points and demonstrate its willingness to implement reforms rather than to implement the reform methodically. So, like many things in India, it caused more chaos than ease of living and doing business.

Even now, after the GST system had been streamlined for a couple of years, many issues remain:

1. There are numerous rates for various goods and services, sometimes over five rates rather than two for simplicity. The absurdity is highlighted in popcorn. Salted popcorn is taxed at 5% GST, whereas caramelized popcorn is taxed at 18% at the movie theater. Recently, a leading restaurant owner in Coimbatore was made to publicly and profusely apologize to Finance Minister Nirmala Sitharaman for bringing another nonsensical discrepancy to her notice. He had explained that, since buns sold without cream were taxed at a lower rate than buns sold with cream, consumers were asking for cream to be sold separately in order to pay less tax.
2. As a Bharati Telecom founder Sunil Mittal, a leading industrialist, has pointed out, telecom and tobacco are taxed at the same rate. This should not be the case, as tobacco is a harmful product and needs to be taxed at a higher rate.
3. Many items, such as petrol, diesel, cement, and steel, are excluded from GST. This leads to a cascading effect where indirect taxes are added to the cost of goods rather than being set off.
4. This indirect tax burden is also passed on to exports. Consequently, exports are not zero-rated for tax, which goes against World Trade Organization (WTO) rules.
5. Some local taxes still exist and have not been subsumed under GST as originally intended. Similarly, the captive power tax at the state level is not eligible for set-off under GST.
6. Petrol and diesel are heavily taxed at both the central and state levels, totaling nearly 100% of the selling price. This results in a situation where both oil companies and consumers are burdened by the taxes, effectively robbing both Peter (the oil companies) and Paul (the consumers).
7. In certain situations, a windfall tax is levied on crude oil imports, which is outside the scope of GST. This tax is applied to oil companies importing crude oil from Russia.

Many imperfections in remain unresolved even seven years after implementation, possibly intentionally. In addition to GST, numerous direct taxes apply, taxing a single item multiple times. For example, dividends are taxed not only at the corporate level but also in the hands of the individual, with a third tax applied to the individual’s total income.

How can the Indian government overcome its rent-seeking habits?

The government seems more focused on maximizing its revenue to cover public salaries and perks than on alleviating the hardships faced by both the common man and the affluent. GST is just one example. All Indian governments since independence — the INC, BJP and others included — have retained a colonial mentality of controlling the population while keeping themselves aloof. The so-called “Indian way of doing things” stifles all aspects of human life, with burdensome approvals required from government departments for everything from obtaining a birth certificate to engaging in economic activity. The common thread is corruption and unnecessary delays designed to extract money from suffering citizens. Sadly, given the poor air quality in Indian metros and the severe pollution of rivers, including Mother Ganga despite millions being spent on cleanup efforts, the statement commonly attributed to the colonizer Winston Churchill seems to have come true: “A day will come when even air and water will be taxed in India.”

Since the year 2000, the leaders of big businesses have increasingly sought to acquire companies overseas and live outside India to escape the government’s clutches. In fact, there has been a significant exodus of wealthy Indians moving abroad for a better quality of life, with destinations like the United Arab Emirates and other regions becoming popular. In addition, blue-collar workers regularly migrate to the Middle East and white-collar professionals to the developed West.

Several models can suggest a path forward. Successful examples include Japan’s Ministry of International Trade and Industry (MITI), established in the late 1950s, which fostered collaboration between business and government with remarkable results. Singapore also saw impressive outcomes by running the government like a corporation. Even China’s authoritarian model has transformed the country over the past 20 years, achieving unimaginable levels of development. In Argentina, the new minarchist president, Javier Milei, advocates for a limited government focused solely on law, order, and military protection, leaving all other activities to the citizens. This approach has yielded striking improvements.

My personal view is that, due to India’s entrenched history of foreign rule, the best solution would be to outsource government functions to professional bodies both within and outside the country. The roles of regulator and government must remain separate. If manufacturing and services can be outsourced, why not government functions? If such a change were to happen, India could flourish and drive the world economy to unparalleled levels of growth, achieving Modi’s vision of India becoming a developed country by 2047.

[Anton Schauble edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.