India’s upper house of parliament on Wednesday passed a landmark reform in the goods and services tax (GST) bill that 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 government hopes to roll out the initiative next year.
Currently, India is less of a single market than the EU. That’s because different states have different – and incredibly complicated – regulations. Their licensing schemes differ from each other while their tax systems are not interconnected. Despite India being potentially one of the fastest-growing economies, with growth over 7 per cent, its state-by-state tax codes discourage doing business across state borders. This explains why Indian companies are, as Bloomberg has pointed out, on average, smaller than their global counterparts.
There is little wonder that this initiative is being widely seen as a game-changer. Economists predict that it would open doors for an incredible economic opportunity for India, boosting its GDP growth by as much as 2 per cent.
A simplified tax structure will also result in greater compliance leading to higher tax income for the government, while it is likely to make goods cheaper for consumers, increasing India’s global competitiveness as an investment destination and creating jobs. As Yusuffali MA, chairman of Lulu group, pointed out that the move sends a “very strong message of India’s pro-development economic policies to the world”.
However, it’s important to remember that passage of the bill is only be the beginning of a long process of reform. Almost half of the states will need to approve the bill before it can become law. We also don’t yet know what the eventual GST tax rate will be, although the government has suggested that it should be between 17 and 18 per cent. There are concerns that the implementation of the tax could be challenging.
Regardless of these hurdles, the move is a significant victory for prime minister Narendra Modi, who came to power in 2014 with a promise of bold economic reform. Although a lot more needs to be done, this one calls for a celebration.
