In 2016, India’s parliament voted to introduce a new Goods and Services Tax. With it, the country replaced a large number of indirect taxes at both the state and federal level and replaces it with one tax – rates for which will be determined by a council of state finance ministers and the Union government.

At the time, this centralisation in tax structure was largely held to be a good thing with proponents of GST arguing that the new tax would – by eliminating state barriers – increase India’s rate of GDP growth by as much as 2%.

While this did not happen, GST’s centralised structure has emerged as a roadblock during the Covid-19 crisis.

Funds shortage

During the United Progressive Alliance years, the Goods and Services tax was sharply resisted by many states – including, ironically, Gujarat where Narendra Modi was the chief minister. Yet, within two years of moving to the New Delhi, as prime minister, Modi was able to reverse this, convincing the states that GST should actually be adopted.

A significant part of this deal was driven by a large carrot the Modi government offered: states would be compensated by the Centre for low GST collections for the first five years as compared to normal state revenues...

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