India’s Landmark Tax Reform Passes Parliamentary Hurdle, Reports Reuters

By Rajesh Kumar Singh

NEW DELHI – India’s upper house of parliament has approved a significant tax reform aimed at creating a unified market across the country. However, opposition members have cautioned Finance Minister Arun Jaitley against imposing excessive taxes on businesses and consumers.

The approval of a bill that facilitates an amendment to the constitution for implementing a nationwide Goods and Services Tax (GST) has been long-awaited, stalling for years due to political disputes. This development represents a key victory for Prime Minister Narendra Modi, who hopes to stimulate growth in Asia’s third-largest economy.

"GST is one of the most significant tax reforms in the history of India," Jaitley declared to lawmakers.

The finance minister expressed his commitment to introducing the new sales tax at the earliest opportunity but did not provide a definitive timeline following the missed initial launch target of April 2016.

This reform aims to merge 11 different state and central taxes into a single national sales tax, which is expected to lower business transaction costs. Economists have predicted that GST could contribute an additional 0.8 percentage points to India’s economic growth over the next three to five years.

However, the potential benefits depend heavily on how the GST is implemented, with particular focus on setting the tax rate appropriately to avoid revenue shortfalls and rising inflation.

A government-appointed panel has recommended a standard GST rate of 17-18 percent, but several Indian states are advocating for a higher percentage.

Concerns have been raised regarding the implications of a higher tax rate, with estimates suggesting it could increase retail inflation by up to 70 basis points. This issue poses a significant challenge for Modi’s Bharatiya Janata Party (BJP) as they face important elections in the coming year.

Analyst Amitabh Dubey commented, "There is a definite risk that the GST will lead to a rise in inflation, which could create negative sentiment."

The introduction of the GST has been a long-anticipated reform for the Modi administration. Originally aimed for an April 2016 rollout, the government hoped to benefit economically before the expected re-election campaign in 2019.

While there was general political support for the measure, disagreements over its structure delayed progress. The deadlock was finally resolved after the government made concessions to the opposition Congress party, which originally initiated the GST but subsequently criticized the current plan as flawed.

P. Chidambaram, Jaitley’s predecessor and a prominent Congress figure, noted that the stalemate could have been resolved quickly if not for government intransigence.

He cautioned against "creeping taxation" and stressed the importance of legally capping the GST rate at 18 percent to ensure it remains manageable, acceptable to the public, and efficient in terms of tax collection.

Chidambaram also urged for provisions that would prevent alterations to the GST rate without the approval of both houses of parliament.

The recent passage of the constitutional amendment initiates a lengthy legislative process, requiring both federal and state parliaments to establish further laws regarding the rate and details of the GST.

Tax experts indicate that enacting additional legislation, training tax officials, developing IT systems, and preparing businesses for the new tax structure could make a launch by the upcoming fiscal year in April quite challenging.

Optimistically, experts suggest that a start date in July or October 2017 may be more realistic if all proceeds smoothly.