India Panel Proposes 17%-19% Sales Tax as Modi Seeks Compromise

  • Prefers single GST; revenue neutral rate in 15%-15.5% range
  • Ministerial panel comprising states to set the final rate

An Indian government panel proposed a national sales tax in the range of 16.9 percent to 18.9 percent, a level that may help Prime Minister Narendra Modi win over opponents and push through one of India’s biggest economic reforms since the early 1990s.

The committee led by India’s top economic adviser Arvind Subramanian called for the creation of a single goods-and-services tax, known as GST. It recommended scrapping proposed exemptions and additional levies, including a 1 percent tax on goods crossing the border of producing states -- meeting another demand of the opposition Congress party.

"The goods-and-services tax proposed will be the cleanest dual value added tax," Subramanian said at a briefing in New Delhi on Friday. "It will be a gold standard for goods-and-services tax with federalist systems."

A final decision will be taken by a council comprising state and federal finance ministers after parliament approves a bill to amend the constitution, paving the way for the GST. The Congress party -- which first proposed the tax in 2006 -- has blocked it in parliament’s upper house, where Modi lacks a majority.

The government will study the panel’s report, Revenue Secretary Hasmukh Adhia wrote on Twitter. Most goods will be taxed at the standard rate, according to the report, the first to come from the Finance Ministry.

Higher Side

"As compared to other economies, it’s on the higher side to ensure sufficient revenue while a few important goods remain outside the GST’s tax net," said Sonal Varma, an economist at Nomura Holdings Inc. Once petrol, alcohol, real estate and electricity are brought inside the net, the standard rate should decline, she said.

The Congress party has sought to cap the rate at 18 percent and deny states any additional levies, which could hurt the GST’s appeal among local governments. The constitutional amendment needs the support of at least 15 of India’s 29 states.

Even so, it fulfills several of the Congress party’s demands, "which should increase the likelihood of the GST passing through parliament," Nomura’s Varma said.

Modi last month reached out to Congress party President Sonia Gandhi and former Prime Minister Manmohan Singh to end the impasse over the GST. He is trying to secure approval during the current parliament session that runs through Dec. 23.

Success would provide momentum to Modi’s reform agenda, which has lagged over the past year in a blow to stocks and the rupee. The GST will replace more than a dozen levies to create a single market among the country’s 1.3 billion people.

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