Last week the upper house of the Indian parliament passed the landmark Goods and Services Tax (GST) bill, which is considered the most sLast week the upper house of the Indian parliament passed the landmark Goods and Services Tax (GST) bill, which is considered the most significant tax reform, post-independence, for the $2tn, Asia’s third largest economy.
But it was not easy getting the bill through in the Indian parliament. The bill saw years of filibustering by the ruling BJP and the main opposition Congress among other political parties in a country, whose tax structure has been very complex by any yardstick.
Economists say the GST subsumes India’s messy plethora of indirect taxes, duties, surcharges and ceases into a single tax. It is expected to ease a cumbersome tax system, help goods move seamlessly across state borders, curb evasion, improve compliance, raise revenues, spur growth, stimulate investment and make investing and doing business in India a lot easier.
India is politically one country, but economically it looks fragmented. The Indian constitution divides taxation powers between the centre and states.
Both levels of government have some exclusive areas where they can levy tax. Income tax, which includes tax on company profits, is the exclusive domain of central government and is referred to as direct taxes.
Indirect taxes are those levied on manufacture of goods, provision of services and consumption. Consumption taxes are the exclusive domain of state governments.
But the problem with the Indian tax structure is that there are multiple taxes when it comes to commerce across state borders. Consequently, it increases costs for consumers and makes economic activity within India all the more complicated.
The GST seeks to address this complex issue.
Goods and Services Tax is an indirect tax reform, which aims to remove tax barriers between states and create a single market.
For that to happen, the Indian constitution needs to be amended first to remove different layers of governments’ exclusive powers to levy taxes.
Indian lawmakers say when the GST is regularised through an Act after further clearance by the lower house of the parliament – Lok Sabha and mandatory endorsement by majority of the states, consumers should benefit in many ways.
Although no country of India’s comparable size and complexity has attempted a tax reform of this scale, experts say some 160 countries already have some form of GST or value added tax.
Analysts expect the federal goods and services tax rate in India to be set around 18%. That is lower than the current tax rate on many items including automobiles and most retail goods.
With a lower tax, and hopes for greater efficiency, Indian businesses are expected to lower prices, spurring greater demand.
India’s finance minister Arun Jaitley affirms that the GST will bolster GDP growth by an extra 2% and create millions of newer jobs – once it goes into effect.
While GST seeks to facilitate “one nation, one tax” as many in India put it, the law concerned may probably take years to get implemented.
But when it gets going, the GST will probably do away with the quilt of taxes that have prevented India from being stitched into a single market.
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