Indian Parliament Votes In Favour Of Sweeping Tax Reforms

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The Upper House of Indian Parliament or Rajya Sabha recently passed the Goods and Services Tax (GST) Bill that could come into force by April 2017. The move is considered as a historic tax reform which will transform India’s USD 2 trillion (or GBP 1.5 trillion) economy by bringing the South Asian country’s 1.25 billion consumers into a single market for the first time.

Indian Finance Minister Arun Jaitley congratulated the Parliament earlier this week for passing the Bill, saying that the GST aimed to stitch together a common national market. Jaitley also said: “It will ensure there is no tax on tax. It would certainly give a boost as far as the Indian economy is concerned.” According to the minister, the GST will replace all provincial and central indirect taxes with a single tax. If 18% is the GST rate, then the provincial governments and the Central government will get 9% each.

Although the main opposition Congress Party has asked for a standard 18% rate (with a 12% lower and 40% higher rate), the Narendra Modi government has made no decision on GST rates. The government said in a statement that GST Council of the Central and Provincial finance ministers, to be set up in the next two months, would decide the rates soon. Speaking at the Parliament, senior Congress leader and former Indian Finance Minister P Chidambaram stressed: “GST does not stand only for Goods and Services Tax, it also stands for good sense triumphs.”

A GST rate of 18% will surely make most services, like restaurants, mobile telephony and electricity, costlier. Currently, they are taxed at 15%. However, some goods may get cheaper as multiple taxes will be replaced by a single levy. After the Upper House, the Lower House of the Indian Parliament or Lok Sabha will have to clear the modified bill that needs to be ratified by at least 15 provincial governments in India.

Financial experts opine that the GST will close tax loopholes and tax more types of businesses, which were previously left unregulated by the old legislation. It also means that Indians will pay less for items, such as electronics or motorbikes, while the price of items, such as tobacco, fizzy drinks, and services, such as eating out at restaurants, could increase sharply. The bill, passed by the Upper House, will also give the Indian government unprecedented powers to set tax rates on goods and services, apart from streamlining the country’s convoluted tax laws into a uniform system.

The GST will subsume at least 11 Central and provincial taxes. Some indirect tax rates will go up, but most are likely to fall. The government claimed that the GST would help India become one market with free movement of goods across 29 provinces. According to the government, tax compliance will be faster, easier and less costly. It also argued that fewer exemptions and evasions would eventually raise the tax collection and poor Indian provinces would benefit more.

Now, the Indian government will need to win the support of 15 of 29 provincial governments, who could still block the Modi administration’s efforts to centralise taxation.

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