Indian business leaders yesterday hailed the passage of a landmark tax reform bill that paves the way for a new national sales tax and the creation of a common market across the country for the first time.
Lawmakers late on Wednesday voted in favor of introducing the long-awaited Goods and Services Tax (GST), which is to replace a patchwork of central and state levies on goods and services and marks India’s most significant economic reform in decades.
The chairman of Bharti Enterprises, one of India’s biggest conglomerates, said it would help boost the nation’s economic growth by up to 2 percentage points.
“The transformational legislation will not just significantly improve ease of doing business in a vast and complex federal set-up like ours by creating a single market, but will help prop up our GDP growth rate,” Sunil Bharti Mittal told the Press Trust of India news agency.
India’s GDP expanded 7.6 percent in 2015-2016, making it the fastest-growing major economy in the world.
The Federation of Indian Chambers of Commerce and Industry said just ahead of the vote that the passing of the GST bill would give industry “a lot of hope on progress of reforms in the country.”
The Indian Congress had repeatedly blocked the bill for more than a year, before finally agreeing to an amended version.
Indian Minister of Finance Arun Jaitley yesterday told a news conference that public opinion had been strongly in favor of the reform.
“Once GST is rolled out, doing business in India will be easier,” he said. “In the long run, tax rates will come down, and if this happens, the prices of various items can go down.”
It will be some time before GST is introduced, because at least half of India’s 29 states have to ratify the move before it can be enshrined in law.
It could cause India’s biggest manufacturing states to lose the revenues they get from selling goods across states, although they will be compensated for any losses for five years.
However, political experts saw the vote in the upper house of parliament as the key hurdle to ensuring the introduction of the GST.
Jaitley has said he hopes it will be in place by April next year, although many experts believe this is optimistic.
The main rate of the GST is still a topic for debate, with experts suggesting it is likely to end up at around 18 percent.
While the GST might increase inflation in the short term because the price of some goods will rise, economists say it will boost business activity and deter tax evasion.
“Prior to GST, companies in India faced multiple-level tax structures, which made it difficult for them to conduct business competitively,” Arun Singh, lead economist at Dun & Bradstreet India said.
“A single tax structure improves the ease of doing business and creates a level playing field for local companies in export markets,” he said.
About 150 countries worldwide have some form of GST or value-added tax, according to the Organisation for Economic Co-operation and Development.
“The political maturity demonstrated by both the government and the opposition in forging a consensus for this landmark event is commendable,” said Harishanker Subramaniam, national leader for indirect tax at EY India.
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