India Closer to Landmark Sales Tax That May Boost Growth

Updated on

India’s lower house of parliament voted Wednesday to amend the constitution to allow for a national sales tax, a step toward creating a unified market for commerce.

The bill must now be approved by the upper house, where Prime Minister Narendra Modi’s government lacks a majority. It then needs ratification by at least 15 of India’s 29 states. Modi aims to implement the goods and services tax in April 2016 to subsume a complex array of levies.

“There is a lot of work which needs to be done in terms of preparation for the government such as appointment of a GST council, draft legislation,” tech infrastructure and management, Santosh Dalvi, a partner at consultant KPMG, said in an e-mail. “For the industry, it means a lot of internal preparation is required within 11 months of time.”

A GST may boost economic growth by as much as 1.7 percentage points by making it easier to do business, the National Council of Applied Economic Research in New Delhi estimates. Yet, compromises struck by the central government with states -- such as excluding petroleum from the GST -- risk diluting some of the benefits.

“The compromises made were necessary,” said Sumit Dutt Majumder, former head of India’s Central Board of Excise and Customs and the author of a book on the topic. “Of course this is not good, but it had to be done to get the states on board.”

GST will streamline tax administration and easier compliance will lead to higher revenues for the federal government and states, Finance Minister Arun Jaitley has said.

Preventing a product being taxed more than once would spur commerce, while casting a wider net over services would help buoy revenue, according to India’s Finance Commission.

Indian industry cheered the approval as a “milestone reform” that would help eliminate the country’s often redundant tax system, while spurring economic growth.

“This is the first step toward making India a single market,” Chandrajit Banerjee, director general of Confederation of Indian Industry said in a statement. “This is the most extensive and far reaching reform in the tax domain which would encourage industry to grow significantly.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE