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Lawmakers in India’s upper house of parliament on Wednesday unanimously approved the creation of the landmark goods-and-services tax, or GST. It will pave the way for the introduction of a new national sales tax, creating a common market across the country for the first time. The tax, which has been kept in limbo for a decade, is seen benefiting industries such as cement, logistics and automobiles by making the movement of products easy across state borders. Finance Minister Arun Jaitley has said it will add as much as 2% points to economic growth.
The GST will replace a patchwork of central and state levies on goods and services and is one of the right-wing Bharatiya Janata Party government’s biggest reforms since taking power in May 2014.
Indian Prime Minister Narendra Modi described the bill’s passage as a ‘truly historic occasion’ and thanked members of all parties for their support. “We will continue to work with all parties & states to introduce a system that benefits all Indians & promotes a vibrant & unified national market,†Modi tweeted after the bill received the thumbs up.
The tax system will integrate India into one economic entity transforming the country into a single market. It will smoothen the transfer of goods and services across the country.
But not all agreed with it. Lawmakers from AIADMK, the ruling party of southern state of Tamil Nadu, abstained from voting and walked out in protest of bill.
There is no denying that creating common market could cause India’s manufacturing powerhouses—such as Tamil Nadu, Maharashtra and Gujarat—to lose revenues they currently get from selling goods across states. However, a key amendment to the bill means they will be compensated for any revenue loss for five years.
The actual tax is still some way off as it needs to be ratified by at least half of India’s 29 states, before a specific GST bill can be introduced to enshrine the tax in law. The government targeting April 2017 for its introduction, a date many experts say is optimistic.
Also the main rate of the GST is still a topic for debate. And it is likely to end up at around 18 percent.
While the GST may increase inflation in the short term because the price of some goods will rise, it will boost business activity and deter tax evasion.
Businesses have pushed hard for years to bring in the tax, saying it will boost economic activity, with lobby group the Confederation of Indian Industry (CII) estimating it will add 1.5 to 2 percentage points to the annual GDP growth rate.
Prior to GST, companies in India faced multiple-level tax structures, which made it difficult for them to conduct business competitively.
A single tax structure will definitely lead to ease of doing business and create a level playing field for local companies in export markets as well.
The bill’s passage will burnish the appeal of Indian assets for global funds, that bought a combined $2.7 billion of stocks and bonds last month. It would also strengthen the Modi government’s credentials of being able to push through difficult legislation in a nation that’s been criticized for its slow pace of reforms.
GST’s clearance sends a strong message to the global investment community. And it increases the attractiveness of India as an investment destination.