India Lawmakers Defer Votes on Tax, Land in Latest Modi Setback

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India's Prime Minister Narendra Modi

India's Prime Minister Narendra Modi

Krisztian Bocsi/Bloomberg

Indian lawmakers delayed votes on bills to create a national sales tax and make it easier to buy land, setting back Prime Minister Narendra Modi’s plans to boost growth in Asia’s third-largest economy.

The bills will now be sent to committees for scrutiny before they are taken up again in the next parliamentary session in July. The delay will make it tougher for Modi to meet his April 2016 goal for implementing the goods and services tax, or GST, one of India’s biggest economic reforms in decades.

Modi has found it difficult to pass legislation through the opposition-controlled upper house of parliament despite winning control of the lower house in an election a year ago. India’s benchmark stock index, among the top gainers globally last year, has been the world’s worst performer over the past month, losing more than 9 percent in that time.

“If you expected too much, then definitely land and GST would tend to be disappointing results -- but that’s not very reasonable and rational,” said Madan Sabnavis, chief economist at CARE Ratings in Mumbai. While he expects that lawmakers will eventually approve the GST, the land bill will be more difficult.

The S&P BSE Sensex index fell 2.3 percent in Mumbai on Tuesday, the steepest fall in Asia. The rupee weakened 0.5 percent and the yield on the 10-year sovereign bond rose to 7.95 percent from 7.89 percent.

Political Fortunes

The opposition Congress party has sought to rally farmers against the land bill to revive its political fortunes after its worst-ever defeat in last year’s national election. It has been generally more supportive of the GST, which was first proposed when Congress held power in 2006.

The GST bill will be scrutinized by a panel comprising members of the upper house that will submit a report in the first week of the next parliament session that typically starts in July, Finance Minister Arun Jaitley said Tuesday. The land bill will go to a broader parliamentary committee.

The GST aims to ease the transfer of goods across the country and reduce opportunities for bribery. The National Institute of Public Finance and Policy, a private research group, initially estimated it would add about 2 percentage points to India’s gross domestic product before it was diluted to win political support.

The bill before parliament would amend India’s constitution, a step that also requires the approval of more than half of the country’s 29 states before it takes effect. Details on the rate and composition of the tax are being negotiated separately.

‘Mega Tax Reform’

Once in force, the GST would streamline tax administration and ease compliance, leading to higher revenues for both the federal government and states, according to Jaitley.

“Investors need to take note of the mega tax reform while making any investment in India,” said Nihal Kothari, a tax expert and executive director at Khaitan & Co., a Mumbai-based law firm. “The cost of doing business in India will change significantly.”

If enacted, the tax measure would become the 122nd amendment to India’s federal constitution, which is one of the world’s longest and came into force in 1950. The document includes provisions that go beyond organization of the government, incorporating items such as exemptions on electricity taxes and the collection of export duty on jute.

Modi, who opposed the GST during his 12 years as chief minister of Gujarat state, has rallied behind the reform since becoming prime minister about a year ago.

“The honeymoon is over,” said Sandeep Shastri, pro vice chancellor at Jain University in the southern city of Bengaluru and an author on Indian politics. “Things won’t be getting easier for the government.”

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