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'One nation, one tax': Indian parliament passes landmark tax reform bill

Updated August 03, 2016


Indian Finance Minister Arun Jaitley with Indian Minister for Chemicals and Fertilizers, Ananth Kumar, arrive at the parliament house in New Delhi. —AP
Indian Finance Minister Arun Jaitley with Indian Minister for Chemicals and Fertilizers, Ananth Kumar, arrive at the parliament house in New Delhi. —AP

NEW DELHI: India's upper house of parliament on Wednesday passed a landmark tax reform bill that will pave the way for the introduction of a new national sales tax, creating a common market across the country for the first time.

After hours of debate, lawmakers unanimously voted in favour of introducing the long-awaited Goods and Services Tax (GST) after Prime Minister Narendra Modi's government reached a consensus with the Congress party and other opposition party members.

The GST will replace a patchwork of central and state levies on goods and services and is one of the right-wing Bharatiya Janata Party government's biggest reforms since taking power in May 2014.

Modi described the bill's passage as a “truly historic occasion” and thanked members of all parties for their support.

“We will continue to work with all parties and states to introduce a system that benefits all Indians and promotes a vibrant and unified national market,” Modi tweeted after the bill received the thumbs up.

The battle to introduce the economy-boosting GST has been one of the fiercest of Modi's premiership, with Congress repeatedly blocking the bill for more than a year, before finally agreeing to several amendments.

Finance Minister Arun Jaitley hailed it as a “great day for Indian democracy and federalism” once the bill had passed.

“It integrates India into one economic entity... India becomes a big market, there will be a seamless transfer of goods and services across the country,” he said earlier on Wednesday.

Not all lawmakers agreed. Members of AIADMK, the ruling party in Tamil Nadu state, abstained from voting and staged a walkout in protest at the bill.

Analysts say the GST could cause India's manufacturing powerhouses — such as Tamil Nadu, Maharashtra and Gujarat — to lose revenues they currently get from selling goods across states. However, a key amendment to the bill means they will be compensated for any revenue loss for five years.

Businesses have pushed hard for years to bring in the tax, saying it will boost economic activity, with lobby group the Confederation of Indian Industry (CII) estimating it will add 1.5 to 2 percentage points to the annual GDP growth rate.

“It is very much in the category of what one would call a big-bang reform,” CII president Naushad Forbes told AFP.

“It's a huge potential efficiency gainer,” he added.

India's GDP expanded 7.6 per cent in 2015-16, making it the fastest-growing major economy in the world.

Ambitious target

The actual tax is still some way off, however, with the government targeting April 2017 for its introduction, a date many experts say is optimistic.

The bill that cleared the upper house on Wednesday simply amends the constitution to grant the government new taxation powers.

The bill must also be ratified by at least half of India's 29 states, before a specific GST bill can be introduced to enshrine the tax in law.

The main rate of the GST is still a topic for debate, with experts suggesting it is likely to end up at around 18 per cent.

While the GST may increase inflation in the short term because the price of some goods will rise, economists say it will boost business activity and deter tax evasion.

“Prior to GST, companies in India faced multiple level tax structures, which made it difficult for them to conduct business competitively,” Arun Singh, lead economist at Dun & Bradstreet India told AFP.

“A single tax structure improves the ease of doing business and creates a level playing field for local companies in export markets,” he said.

About 150 countries worldwide have some form of GST or VAT (Value Added Tax), according to the Organisation for Economic Cooperation and Development.

“The political maturity demonstrated by both the government and the opposition in forging a consensus for this landmark event is commendable,” said Harishanker Subramaniam, national leader for indirect tax at EY India.