India passes landmark tax bill that’s been 10 years in the making

India’s parliament has approved a long-awaited overhaul of the country’s fragmented tax system to create a genuine single market in one of the most significant reforms to the Indian economy since liberalization started 25 years ago.

The bill, debated in New Delhi for almost a decade, will amend the constitution to permit replacing the current patchwork of national, state and local levies with a single, unified value added tax system.

Economists believe modernizing India’s existing antiquated, inefficient tax system will significantly stimulate the economy, potentially adding 1.5 to 2 percentage points to GDP growth a year.

“It would certainly give a boost [to] the economy, which is required at this critical stage,” Arun Jaitley, the finance minister, told parliament during the debate on the amendment.

The new goods and services tax will also help Prime Minister Narendra Modi’s drive to promote Indian manufacturing by reducing the heavy burden of cascading taxes — or tax on tax — on locally made products.

“It’s a transformative change for the country,” said Naushad Forbes, president of the Confederation of Indian Industry and co-chairman of Forbes Marshall, which makes boilers and industrial equipment.

The new regime, in which companies can claim tax credits for tax already paid by their suppliers, is also expected to improve tax compliance, boosting government revenues in the long run. Industry groups say it will be far easier to transport goods between different Indian states, something that at present is a bureaucratic and logistical challenge.

“Business is very thrilled about it and it will add tremendous benefits to the Indian economy,” said Adi Godrej, chairman of Godrej Group, a large consumer products conglomerate.

The benefits will also be cheered by foreign companies such as Japanese and western carmakers, and brands including Ikea, H&M, Gap and Zara, which now sell their goods to Indian consumers.

The constitutional amendment was approved by the lower house of parliament last year but had stuck for months in the upper house. Its unanimous approval on Wednesday ended the long deadlock. The lower house must reapprove the bill, because several changes were made to the draft, but it will sail through quickly, given Modi’s majority there.

Steering the constitutional amendment through parliament is a significant if tardy achievement for Modi, who swept to power two years ago pledging to accelerate India’s then faltering economic growth.

But his administration faces a race against the clock to realise its goal of bringing the new tax regime into force by the time India’s next fiscal year begins on April 1.

“It is not impossible but a lot of agencies will have to work double time to meet the April 1 deadline,” said Rajeev Dimri, partner at BMR Associates.

Amending the constitution, which had delineated different taxes to be collected by the national government and by states, was the biggest political hurdle, as it required a two-thirds majority in parliament. Rivals from Modi’s Bharatiya Janata party and the opposition Congress party had long made that tough to achieve, despite the general consensus among policymakers on the need for reform.

Once the constitution is amended, which still requires the approval of half of India’s state legislatures, parliament must pass the Goods and Services Tax bill with more details, now being scrutinised by business groups, of how the tax system will work.

The government must also decide the new GST rate, potentially the subject of fierce debate, while all states will have to pass their own GST laws. During the parliamentary debate, members of the Congress party repeatedly reiterated their demand that the GST rate be capped at 18 per cent, something the government has so far been reluctant to agree.

While that may seem a tall order, tax reform is finally in sight, even if it is not realised by April 1 next year.

“This is not an income tax — it’s a transaction tax, and it can be introduced from any day,” said Dimri. “It’s not a scenario where if it’s not April 2017 it has to wait until April 2018.”

Source: Financial Times