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Letter from Mumbai: Tax reforms: reluctance and sense of duty

Letter from Mumbai: Tax reforms: reluctance and sense of duty

CRUCIAL reformative legislation, which can have a dramatic impact on the economy, has a tendency of getting bogged down in political controversies that drag on for a decade or even more.

The latest such piece of legislation, relating to the Goods and Services Tax (GST), which was finally passed unanimously by the Rajya Sabha, the upper house of the Indian parliament, last week, is one such law with a chequered history.

Fortunately, both the major parties — the ruling Bharatiya Janata Party and the opposition Congress — decided to finally bury their differences, and with the support of most other parties ensured that the GST bill is passed. The Lok Sabha, the lower house of parliament — which had last year passed the constitutional amendment bill — will now have to endorse the changes suggested by the upper house.

Finally, half the state assemblies will have to pass the bill for the GST law to come into force. The BJP-led National Democratic Alliance is ruling in 13 of India’s 29 states; and with the help of some friendly parties, it will easily manage to get support for the constitutional amendment bill from two other state assemblies before the end of the year. The party wants to ensure that the law comes into force from April 1, 2017.

“This is one of the most significant tax reforms in India in recent history,” remarked Arun Jaitley, the finance minister, after the upper house passed the bill. “The enactment of GST will bring about the best in the economic management of the country in its federal form; and it will empower the states.”

The GST will do away with a multiplicity of taxes — 17 to be precise — including central excise and service tax (imposed by the central government) and state levies such as value-added tax, stamp duty, entry tax and octroi (imposed by local bodies). Economists estimate that the GST has the potential to boost India’s GDP by 1.2pc.

The GST legislation has had a tortured journey over the past few years. It was in 2006 that the Congress-led United Progressive Alliance (UPA) — with P. Chidam­baram as the finance minister — first proposed the enactment of the GST law, and set April 1, 2010, as the deadline.

A joint working group, an empowered committee and even a task force of the 13th Finance Commi­ssion went into the proposal over the next few years and backed the GST move. Almost a year after the 2010 deadline was missed, the UPA government introduced the Constitution amendment bill, seeking to do away with existing taxes (excise, service, VAT, etc) and introduce a uniform indirect tax on goods and services.

But the BJP, which had lost to the Congress in 2004, had been a vociferous opponent of all reforms and had stonewalled key legislations proposed by the then ruling party — including GST, the civil nuclear deal with the US and the opening up of multi-brand retailing to foreign investments.

The Congress-led UPA was not in a position to overcome opposition from the BJP and the GST bill lapsed with the dissolution of the Lok Sabha in 2014. But after the BJP’s stunning victory in general elections that year, it revived the GST bill and got it passed in 2015 in the lower house where it was in the majority.

It was then that Congress opposed the GST bill. It took the government more than a year to bring the Congress around and get the bill passed in the upper house last week.

MOST businesses look forward to the GST era as they expect a sharp reduction in harassment from multiple tax authorities in different states and dramatically lower costs in areas such as compliance and logistics.

Many companies with a nationwide presence would set up warehouses in different parts of the country to avoid paying multiple taxes. For companies such as Amazon — and Indian start-ups such as Flipkart and Snapdeal — doing business has been a nightmare.

Analysts expect massive warehouses to now come up across India as the likes of Amazon and Flipkart would find it easier to do business with a single rate of tax applicable on their products.

Doing business on a pan-India basis has indeed been difficult for entities, as tax rates and rules differ; even interpretations can vary and differences between tax officials and companies end up in courts, where matters can drag on for years.

Tax consultants and lawyers have a thriving practice as businesses have to seek their help in negotiating the treacherous tax minefields laid by various state governments and local bodies across the country.

The GST law will create a single market comprising of a billion-plus consumers, do away with fiscal borders between states and bring about tax uniformity across the country. Some have even compared it to the series of treaties that brought about integration in Europe. The GST will integrate the 29 states and seven union territories into one common market.

Fortunately, almost all the states — except Tamil Nadu, ruled by the All India Anna Dravida Munnetra Kazhagam — have backed the new law. Jaitley claims that the GST will boost state revenues, both industrially advanced and backward ones.

Tax rates will be decided by a GST Council, which will include the country’s finance minister as chairman and ministers from different states. The central government will give up the right to impose central excise duty and service tax, while states will give up sales tax on goods (VAT) and other taxes.

The maximum rate of tax under GST is expected to be 18pc, though there is provision for an additional ‘sin’ tax on products such as alcohol and cigarettes.

If the GST is fixed at 10pc, many manufactured goods in India — currently attracting higher excise duties — will become cheaper, whereas services (currently attracting lower service tax) will become dearer. Indeed, telecom companies are worried that telephone bills will increase significantly if the GST is fixed at 18pc.

But for now, India Inc is overwhelmed that the political class has finally joined hands to introduce a reformative legislation that will hopefully boost growth.

Published in Dawn, Business & Finance weekly, August 8th, 2016

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