Photographer: Dhiraj Singh/Bloomberg

Modi Compromise Puts India Closer to Simplifying Tax Regime

  • Cabinet adjusted legislation that would clear way for a GST
  • ‘It would dramatically increase efficiency in the country’

Prime Minister Narendra Modi’s cabinet met a key opposition demand on proposed legislation that would clear the way for a national sales tax, putting India closer to passing its most ambitious economic reform since the 1990s.

The cabinet decided late Wednesday to eliminate an additional 1 percent charge on inter-state sales that was included in a constitutional amendment bill to create a goods-and-services tax, known as GST. The opposition had argued that the additional levy would undermine the goal of creating a single market among India’s 1.3 billion people.

The development is welcome and could help “pave the way for political consensus and early passage of the bill," Harishanker Subramaniam, a tax specialist at EY India, wrote in an e-mail.

Modi’s party has indicated it will push the measure next week for discussion and possibly a vote before the current session of parliament ends on Aug. 12. If the amendment clears the upper house, it needs to be ratified by more than half of India’s states. Then parliament must pass another bill to implement the tax.

Political bickering has held up the constitutional amendment in India’s upper house of parliament for more than a year. The GST, initially proposed by the main opposition Congress party a decade ago, would lower the cost of doing business in the world’s fastest-growing economy.

“This really is an important reform," said Jan Dehn, London-based head of research at Ashmore Group Plc, which manages out $51 billion in emerging markets. “It would dramatically increase efficiency in the country and could lead to a wave of mergers and acquisitions. India’s home market is huge, but fragmented. GST would unify it.”

Obstacles Remain

Senior Congress party leaders Anand Sharma and Ghulam Nabi Azad weren’t available for comment when reached by phone on Thursday.

Several obstacles remain. Besides the 1 percent tax, Congress is demanding that the tax rate is capped at 18 percent and written into the constitutional amendment.

The government has indicated that it will consider this demand even though it prefers to leave the rate out given the difficulties of adjusting it in the future. Congress has said it’s open to placing the rate in subsequent legislation after all the state governments pass the constitutional amendment.

Congress also wants an independent dispute resolution panel headed by a retired judge to intervene in case of disputes over revenue sharing once GST is implemented. The current bill gives this power to the GST Council, a body comprising the finance minister and his counterparts in India’s states.

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