Comment by anuraj | Hacker News Reader

Comment by anuraj | Hacker News Reader

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First of all legwork for GST was done by previous UPA government. Modi to his credit has done the diplomatic work to get states ratify the same. And give where credit is due - It is the states with 2/3rd votes in the GST council that did the final negotiations and got GST a success and made uniform tax across the country a reality. The IT infra is woefully inadequate - I expect the pain to last at least 2 years till adequate infra is created by govt and enterprises and till then manual accountants would have huge job opportunity. In the short term we will see a marginal contraction of the economy due to high compliance costs and readjustments in the value chains.

In a way GST will also pave way for higher tax sharing between centre and states and shall strengthen federalism - income tax sharing is the next in line. And slowly India shall become a union of states as it should have been.

The Centre already shared its revenues from all Central taxes, including income taxes with the States before this reform. They shared 32% earlier and increased that to 42% just before GST. Centralising all taxation isn't necessarily a good thing, at least not for all states. Before GST, taxes were levied at the point of manufacture. This helped states with strong manufacturing bases to raise revenue and set up infrastructure and encourage even more manufacturing. A virtuous cycle. States could be mostly self sufficient, using Central funds to augment their money.

If the Centre collected all the revenues, the states would be entirely dependent on the Centre. Sure, 42% of the revenue needs to be shared with the states, but the proportion is at the Centre's discretion. I would expect that the party in power at the Centre would funnel funds towards states which are electorally important (UP, Maharashtra) and away from ones that don't play much of a role in national politics (TN, North Eastern states). That's great if you live in UP, not so much if you're Tamil. In such a situation, I foresee that it could actually fuel resentment in states from where wealth is taken and cause the Union to weaken. We see this happening in Catalonia in Spain, for example.

I agree with everything else that you said, that there will be short term contraction but this simplified tax code will be helpful for businesses in the long run. Simplifying it even further and making it a central tax only would be a boon for businesses, but possibly not for the Union.

Sharing at centre's discretion is not enough. I am talking about separate State and Central Income Tax as in several federal democracies. It is an idea whose time shall come sooner than later.

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