India’s GST Bill makes its way to Parliament

Dated 22nd December, 2014

After several months of cautious moves on his reforms agenda, Prime Minister Narendra Modi's plans to create a unified Indian market have entered the final stages.

The government yesterday introduced a goods and services tax (GST) Bill in Parliament after the Cabinet cleared the amendments to it on Wednesday.

The Bill will have to be passed by a two-thirds majority and ratified by at least half of the state assemblies.

But, with only three working days left in the current session, and opposition parties blocking proceedings in the Upper House on an unrelated issue, the Bill will get full parliamentary approval only in March during the budget session.

Yesterday, Finance Minister Arun Jaitley introduced the Bill in the Lower House. "GST will be the single most important tax reform, with the potential to convert the entire country into a single market, and avoid taxation over taxation... The aim is the seamless transfer of goods and services across the country."

Under the current system, those moving goods within India must pay an entry tax at each state border, federal sales tax, local sales tax, excise duty and a host of other taxes.

Every state fixes its own rates, so taxes on each product and service vary from one state to another. Thus, manufacturers face multiple taxes.

Analysts said the introduction of a GST would reduce this to a simpler, single taxation system for all goods and services.

That, in turn, is expected to lead to better tax compliance and reduce corruption, while ultimately increasing government revenues.

A study by the National Council of Applied Economic Research indicated that GST could increase growth by 0.9 to 1.7 percentage points at the time it is introduced.

Mr D. H. Pai Panadikar, president of the private RPG Foundation think-tank, said: "One major benefit is that India becomes one market. That is the greatest advantage of a GST.

"What happens now is the country gets divided by the tax system because each state has its own tax. Although we are one country, we are not one market at the moment...

"So, (the GST) simplifies many things. It will make a tremendous difference to the economy."

A unified tax system has been some years in the making. Efforts by the previous Congress-led government failed to take off for lack of a political consensus among the 29 states in India.

Among those who had opposed the GST was Mr Modi himself, who, as chief minister of the state of Gujarat, had argued that a unified tax would be difficult to implement.

Other states, too, have kept up their opposition, arguing they would lose revenue under a unified tax structure.

Last week, however, the federal government hammered out a compromise that promises a compensation package to the states for any loss of revenue.

Petroleum products will not be affected by the GST.

The move is also expected to help boost manufacturing as the government unveiled an ambitious new campaign.

"GST will also help to promote the government's prime initiative of "Make in India" which will clearly help industrialisation, employment opportunities, foreign exchange earnings and the exchequers," said Mr Harsh Shah, associate partner at Economic Laws Practice.

Mr Modi's Bharatiya Janata Party came to power in May with a promise to fix the flagging economy. In the last six months, it has opened up sectors, such as construction and defence, apart from deregulating diesel prices and announcing that foreign firms would be allowed to mine coal.

The introduction of the GST is expected to reduce criticism that the government has been undertaking only the easy reforms.

Mr Sachin Menon, partner and head of indirect tax at KPMG, said: "This is the mother of all reforms in the last century... This will have economic, fiscal and social impact. The tax system has been distorted. Under GST, distribution of taxes will be fair."

(This article is published in Asia One Business on 22nd Dec, 2014)