The next major economic reform that has to work its way through India’s parliament is the long-awaited goods and services tax (GST).
This will be one of the biggest tax reforms, which aims to levy a uniform national tax on good and services, simplifying the existing regime. The government wants to implement it from April 1 next year.
Investors and corporates had been hoping that the GST would be passed in the current session of parliament, which ends on May 8. But plans to discuss the bill were postponed from Wednesday and are scheduled to take place this week instead amid a busy agenda. There has already been resistance among the opposition in parliament.
The implementation of the GST is considered to be critical to boosting investor confidence.
India’s announcement of a retrospective capital gains tax for foreign institutional and portfolio investors has prompted a sell-off in equities and debt by overseas investors.
“A more effective way of raising taxes without undermining private sector sentiment would be to simplify, rather than add more uncertainty to, the tax system,” said Shilan Shah, the India economist at Capital Economics.
“In that regard, the implementation of the goods and services tax looks crucial. A uniform GST would also help to broaden the tax base and ensure a more stable flow of revenues.”
He does not believe that it will be easy to implement the GST, however. After securing the approval of both houses of parliament, it would need to be approved by half of the state assemblies.
“Progress on implementing the GST has been faster than under previous administrations,” Mr Shah said.
“But even so, given that there are still a few sticking points between state and central government, we doubt that the GST, even in a diluted form, will be implemented before 2017, and there is the potential for this to drag on much longer. Until then, the government is likely to continue missing its tax revenue targets, meaning the threat of retrospective taxation will continue to linger.”
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