India: Landmark Reform To Unify Taxes

After years of stalemate, India is set to pass breakthrough tax reform.

The Indian parliament’s adoption of a constitutional amendment bill has paved the way for the biggest tax reform in the $2 trillion economy’s history, as Narendra Modi’s government prepares to usher in a dramatic change in the tax regime: a single goods and services tax (GST) that subsumes all central, state and local levies.

A political standoff delayed tax reforms for 13 years; now the change is being hailed as the single most important reform since the economy was opened up in 1991 by then-Finance minister Manmohan Singh.

This bill is widely expected to win the required backing of at least 15 of 29 state legislative assemblies, for rollout starting April 1, 2017. The GST will replace multiple taxes that total 26% of revenue, and, proponents claim, boost the economy.

“The GST will ensure one tax in the entire country and result in a seamless transfer of goods and services, adding 1.5% to 2% to the country’s GDP,” Arun Jaitley, India’s Finance minister, told parliament. Former revenue secretary Vijay Kelkar endorsed Jaitley’s views and said the GST had the potential to push India’s economic growth to double digits in long run. Kelkar headed a panel in 2006 to recommend tax reforms.

Foreign companies are expected to be big beneficiaries, as “ease of doing business” is bound to improve with a single tax payout and the elimination of an obscurant tax bureaucracy. They will also benefit as India becomes a huge common market, like the EU, replacing multiple taxing jurisdictions.

Under the GST, companies can claim credits on taxes paid by suppliers. The GST, by simplifying and unifying rules, is also expected to boost revenues for both state and federal governments while improving compliance.

However, big challenges for the Modi government include setting the GST at a modest 17% to 18% (to contain the possibility of stoking inflation), setting up a GST council that will finalize the rates and keeping the supporting infotech infrastructure leak-proof to make rollout smooth.