After years of political bickering, tax reform - considered transformative - has been passed by India's upper house of parliament, paving the way for a country of 1.3 billion to turn into a common market (free trade area).
In the long run, the Goods and Services Tax (GST) will boost India’s $2 trillion economy by doing away with a confusing mesh of taxes and duties levied by India’s 29 states and the federal government that have bogged businesses.
Finance Minister Arun Jaitley said the tax is the most significant in the history of India.
“It would convert India into one uniform economic market with a uniform tax rate, bring about a seamless transfer of goods and services across the country, enable us to check evasion and therefore enlarge the revenues,” he said.
The government managed to build a political consensus a year and a half after the reform was passed by the lower house by bringing the main opposition Congress Party and most state governments on board. The result: a civilized debate in parliament where noisy disruptions are common.
“We were never opposed to the GST. The country is now ready to embrace the idea of a GST,” said top Congress Party leader and former Finance Minister P. Chidambaram.
Some hurdles ahead
But there is still some ground to be covered before the country makes the transition to a common market and starts seeing benefits flowing from the reform measure. Although the government hopes to implement it by April, experts say it could take time to set up new tax machinery. It must also be ratified by at least half the states.
The rate of taxation has yet to be set, and it remains a contentious issue with several state governments pushing for a higher tax than the 18 percent rate the federal government favors.
The Congress Party warned against setting too high a rate saying that it should not exceed 18 percent. “That alone will make it non-inflationary, acceptable to the public and an efficient way of taxing,” said Chidambaram.
But economists hailed the passage of the measure, with some calling it “reverse Brexit” as it will bring down barriers to business.
The GST is expected to significantly improve the ease of doing business not only for large companies, but also for small businessmen. Manufacturers will get a boost. India’s main e-commerce companies have welcomed the passage of the GST saying it will make it much easier for them to distribute goods across the country as they won’t have to cope with multiple levies. It will also make life earlier for India’s truckers who struggle with tax officials at state check posts.
‘Evolutionary process’
“One has to look at this as an evolutionary process,” cautioned D.K. Srivastava, a former professor at the National Institute of Applied Economic Research, saying a lot of adjustments will be needed. “But after two to three years when it settles down, it would eliminate the interface between the industry and the traders and the government.”
Lawmakers expressed hope it would lead to more transparency, improve compliance and reduce corruption that has stemmed from a tax regime that baffles many businessmen.
In the long run it is expected to benefit consumers, who currently pay different prices for goods in different states.
