Implementation of a national GST replacing a plethora of central and state taxes in India is the most critical economic reform being attempted since the “economic liberalization” program in the 1990s, when India dismantled government controls on private and foreign ownership and drastically reduced barriers to trade. Just as the economic reforms of the 1990s unleashed new entrepreneurship and economic growth, the GST could potentially be a game changer for the Indian economy.
The existing system of multiple levels of taxes under different central and provincial administrations creates significant hurdles for the integration of production networks and supply chains, while imposing substantive transaction costs in business and logistics operations in India. Logistics costs in India are estimated to be around 14 percent of GDP, compared to below 10 percent in most other major economies. Similarly, the additional cost of compliance in dealing with a multiplicity of taxes is estimated to be around 1.5 to 2 percent of GDP.