India’s Modi seeks to realise tax reform

Posted on July 17, 2016

epa05420857 Indian Prime Minister Narendra Modi, gives his public lecture at the University of Nairobi with students, Nairobi, Kenya, 11 July 2016. Modi is in Kenya to wrap up his four-nation Africa tour aimed to boost economic ties with the continent. EPA/DANIEL IRUNGU©EPA

India begins its four-week monsoon session of parliament on Monday, with the government of Narendra Modi, prime minister, hoping to move ahead with long-awaited tax reforms aimed at turning the country into a genuine single market.

The adoption of a goods and services tax, or GST — to replace a raft of different state and local taxes with a single unified value-added tax system — is seen as potentially transformative for India’s economy.

    But despite the widespread consensus on its desirability, a GST has been stalled for years as India’s political rivals — Mr Modi’s Bharatiya Janata party and the opposition Congress — have each sought to claim the credit for steering it through parliament. 

    Implementing the GST requires amending India’s 66-year-old constitution, which empowers the federal government in New Delhi, and allows states to collect retail sales taxes. The constitutional amendment to change this system has been approved by the lower house but is stuck in the upper chamber, where the BJP has struggled to secure the necessary two-thirds majority. 

    In recent days, Arun Jaitley, finance minister, and other BJP leaders have reached out to the Congress party to
    smooth the bill’s passage, and the BJP has expressed optimism it will go through in this parliamentary session.

    India’s business community, which has long urged the simplification of India’s tax system, is watching with a mix of hope and anxiety. “We are holding our breath,” said Yasho Saboo, owner of Ethos Watches, India’s largest watch retailer.

    “It’s a tax reform we badly need, and that is long overdue. It’s nonsense to have different indirect taxation rates in different states; it makes moving things across internal boundaries so difficult. We’ve been talking about this for close to a decade now, and it’s going to have a huge and positive impact on our business.” 

    The GST was originally suggested by Congress when it was in power nearly 10 years ago, but it made little headway. Mr Modi’s government has pushed to see it realised, but has faced resistance from Congress — now in opposition.

    The tax reform is expected to improve the ease of doing business, encourage more investment in manufacturing and boost GDP by as much as 1-2 per cent.

    But even if the bill is passed in the coming weeks, India still has much to do before the GST can become a reality, despite New Delhi’s hopes of implementing it by April next year.

    “The amendment is just the first step,” said Rajeev Dimri, a partner in BMR Associates, an accountancy firm. 

    Once approved by parliament, the amendment must be ratified by the legislatures of half of India’s 29 states, though that process is expected to go smoothly given the general consensus on the issue. 

    Yet India’s parliament will then have to pass two new pieces of legislation to detail the new tax code — including the proposed tax rates. Similar tax laws will also have to be passed by at least 22 states. The government will also need a new IT system, on which work has already begun, as will companies. 

    “If the amendment gets passed it is a bit of an uphill task [to implement by the deadline] but do-able,” said Rajeev Malik, senior economist at CLSA.

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