Race to the bottom through competitive populism - PM cautions
Addressing the CMs and officers of the Northern States organised by the PHDCCI, the Prime Minister said yesterday,
I am told that free flow of trade can add up to 2% to state growth rates across the region. The introduction of VAT has been the biggest success story in recent times in moving towards a simplified, friendly tax system. And VAT has proved its utility as state revenues have shown a healthy growth.
However, much more needs to be done in improving your tax systems. Tax rates, even if not unified for all products, vary widely across states. They need to be harmonised. In an ideal world, VAT should be the only tax on goods. We continue to have octroi, luxury taxes, mandi taxes and other levies. In the long run, as we move to a common Goods and Services Tax as announced by the Finance Minister, most of these taxes should disappear. I urge Chief Ministers to work towards harmonizing and rationalizing VAT within the region as a first step towards a GST.
The other related area is fiscal incentives and tax breaks which are provided for promoting industrial development. The jury is still out on whether these policies really promote industrial growth. But in the process, in the excitement to have headline grabbing MOUs, we offer incentives – both fiscal and financial – which our finances cannot sustain. I urge PHDCCI to work together with State governments in ensuring that there is no “race to the bottom” in fiscal terms through competitive populism. We have to enable a “common economy” and a “single market” to emerge.
There are other barriers to trade as well. Free movement of goods, transport and people is hindered by border checks and taxes on vehicles. Trade in agricultural produce has additional hindrances. These are well known. We need to simplify procedures, reduce controls and promote greater coordination across states so as to facilitate rather than hinder movement of people and goods. Even if taxes have to be paid and regulations to be complied with, why cannot they be done in a customer friendly manner? Advances in technology along with coordinated efforts can make such movements seamless. This is an attainable goal.