A massive delegation of Indian finance officials is in Canada this week looking for tips on how to successfully launch a new sales tax. One of the main lessons they’ve learned so far: Putting it to a referendum is a bad idea.
India is working on a proposed goods and services tax that would be similar to Canada’s federal sales tax system, in that it would be paid by consumers and clearly stated on receipts. It would also be similar to Canada’s harmonized sales tax by dividing revenues between two levels of government.
Canadians have more than a few stories to tell. While the Indian public servants are learning about the details of Canada’s tax collection system, the finance ministers of Indian states are keenly interested in the politics.
After touring the halls of Parliament Hill for meetings with senior cabinet ministers and public servants, the group of about 50 state and federal finance officials will head to Vancouver.
The politicians in the group are particularly eager to learn from British Columbia’s sales tax experience, because it went so horribly wrong. There, the Liberal government ran into fierce public opposition over plans to adopt the HST, a move that was rejected last year in a referendum that forced the province to return a $1.6-billion incentive it received from Ottawa.
“British Columbia’s experience is very important for us, because we personally feel that no taxation proposal can win in a referendum,” said Sushil Kumar Modi, who is leading the delegation and is also deputy chief minister of the state of Bihar. Mr. Modi, who spoke to The Globe and Mail on Parliament Hill between visits with Canadian officials, said it takes time for people to understand the benefits of a tax change.
“So I don’t know why [B.C.] went for a referendum,” he said.
The answer is that the referendum wasn’t the government’s idea. It was triggered by British Columbians who successfully campaigned for the use of a 1995 law allowing citizen-initiated referendums.
The delegation is also holding talks with Ottawa on bilateral issues, including free trade negotiations, energy security and immigration. But the sales tax is the focus of their discussions. Last week, the group visited Toronto to meet with provincial officials and business leaders, and is working its way through Canadian political history to find out why some provinces have signed on to the HST while others resisted.
Canada’s national sales tax has been at the centre of political debate for years. The GST’s introduction in 1991 by Brian Mulroney’s Progressive Conservative government was hugely unpopular and contributed to the party’s annihilation. The Liberals swept into power two years later promising to abolish the tax, but never did. Instead, the Liberals brought in the HST, which initially only the Atlantic provinces supported.
Prime Minister Stephen Harper came to office in 2006 with a simple but effective promise to cut the GST from 7 to 5 per cent. Mr. Harper would later offer financial incentives to Ontario, B.C. and Quebec to bring them into the HST fold.
Mr. Modi says there are similarities in India, in that some states are likely to reject such a tax. He said the Canadian example shows the adoption can be voluntary and that federal incentives can encourage governments to sign on, while governments can also offer short-term tax breaks to citizens to make the change more popular.
A similar Indian delegation visited Europe last year, and another trip is planned to Japan. India’s economy is highly cash-based, so a national sales tax is seen as a way to boost government revenue, reduce tax avoidance and simplify tax rules for business.