At the wholesale level, price differences also exist, even within narrowly defined geographical areas. Take the case of potatoes, for example. Price records show that 90km north of Delhi, in Panipat, Haryana, potatoes have sold up to 88.5 percent cheaper than in Delhi. On average, that district shows potato prices being 38 percent cheaper (Table 12 in the Appendix). Also, on average, focusing on absolute differences for all products considered for the wholesale analysis, Punjab and Kerala have the lowest and highest recorded price differences with respect to Delhi, respectively. In terms of products, tomatoes have the highest recorded differences, while Bengal grams have the lowest (see Appendix to this section for descriptive statistics).

_The GST as an integrating force_ Until the summer of 2016, Indian legislation allowed for a complex, and multilayered federal, state, and local indirect tax structure. During that summer, the Indian Parliament approved the Goods and Services Tax (GST) legislation that will help simplifying the current structure and will facilitate India becoming a single, unified market, by removing tax and non‐tax barriers that increase the costs of inter‐state and international trade. Under the existing structure (expected to be gradually replaced during 2017), at each point of sale, additional taxes are applied to the after‐tax value of each good and service. Many of these taxes vary by state. A central objective of the GST is to eliminate the compounding effect by fixing the final tax rate, with goods falling into one of four rate categories (5, 12, 18, and 28 percent).

Before GST, inter‐state trade has been subject to tax and non‐tax barriers. Tax barriers include the Central Sales Tax (CST) on goods, a tax levied on all cross‐state trade that is not destined for, nor originates from abroad (2 percent), entry taxes – levied on the entry of goods into a state for the consumption, use or sale therein (varying from 0‐12.5 percent depending on the state), and the restriction of input tax credit on inter‐state sales. Non‐tax barriers include the transaction costs of dealing with a different tax regime in each state, comprising of multiple indirect taxes. Take for example a manufactured good that is produced in Andhra Pradesh (AP). If sold in AP, the total tax would amount to 29 percent (compounding the Central Value Added Tax – CENVAT – of 12.36 percent and the AP VAT of 14.5 percent). If instead the good was to be sold in Maharashtra, the total tax would be of 48 percent, including CENVAT, AP VAT, an additional 2 percent of CST, and an entry tax of 12.5 percent in Maharashtra.<sup>4</sup> This system discourages across‐state specialization and market integration, encouraging instead, state autarky, increasing price dispersion among the products that are subject to these taxes. The new GST merges many of the central and state taxes into a four‐tier schedule going from 5 to 28 percent (necessity goods taxed at 5 percent, and luxury and consumer durables at 28 percent, with most goods and all services being at standard rates of 12 or 18 percent. This implies that goods produced in AP will be subject to the same tax regardless of where in India they are sold. In summary, the GST reduces the average tax rate on manufacturing goods and makes them uniform across states (see Van Leemput and Wiencek (2017) for a thorough discussion).

By merging central and state taxes, and increasing incentives to trade across state‐borders, the GST is expected to be welfare‐improving for all states in India. Some effects have already started to materialize. Van Leemput and Wiencek report an expected estimated improvement on real GDP of between 3.1 and 4.2 percent (under alternative product allocation assumptions among the different proposed GST rate tiers). The intuition is that a reduction of domestic and international trade barriers increases welfare through consumers’ access to cheaper products. Additional sources of welfare gains could result from cheaper sourcing of intermediate inputs – the creation of Indian‐level rather than

> 4 See more examples in Van Leemput and Wiencek (2017).

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