India's Upper house of parliament on Wednesday (3rd August), approved the creation of a national sales tax a decade after the move was first proposed. This is hailed as the biggest legislative victory for Prime Minister Narendra Modi, ever since he took office in 2014 and some of the experts even considers this as the most important economic measure since India opened its markets in 1991.
Goods and Services Tax (GST) is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level. The GST is expected to turn India into one common market, leading to greater ease of doing business and big savings in logistics costs from companies across all sectors.
Potentially one of the most dynamic economies in the developing world, India is hampered by a bewildering array of state-by-state tax codes that discourage doing business across state borders. Experts also say that GST is likely to improve tax collections and boost India’s economic development by breaking tax barriers between States and integrating India through a uniform tax rate. A simplified tax regime aims to ease the transfer of goods across the country and mitigates almost all existing shortcomings.
However, as the case with every tax system, how thinly crafted and robust it is, some companies will gain more as the GST rate will be lower than the current tax rates they pay; others are expected to lose as the rate will be higher than the present effective rate. While the rate of GST is yet to be decided, industry observers have assumed an 18% rate recommended by a government panel in making their impact calculations. GST is a consumer based tax and not origin based. Through this tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.
Though, it’s great that the GST bill has been passed in the upper house. However, the main opposition party, Congress demanded to cap the tax rate at a certain percentage, they fear that else the buyers end up paying upto 1/4th of the MRP or even more as tax.
Hailing the passage of Constitution Amendment Bill on GST as a truly historic occasion, Prime Minister Narendra Modi in a series of tweets thanked the leaders and members of all parties and said that the bill will be the best example of cooperative federalism. He tweeted, “On this truly historic occasion of the passage of the GST Bill in the Rajya Sabha, I thank the leaders and members of all parties. Our MPs must be congratulated for their path breaking decision to give India an indirect tax system for the 21st century… This reform will promote 'Make in India', help exports & thus boost employment while providing enhanced revenue. I would like to add that GST will also be the best example of cooperative federalism. Together we will take India to new heights of progress”.
"This is one of the most significant tax reforms in India in recent history," Finance Minister Arun Jaitley told lawmakers ahead of the vote, adding that, "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".
In 1954, GST was introduced for the first time in France. Today this tax has spread across 140 countries. In the Indian case, as the next step, the bill has now to be endorsed by the lower house and then ratified by at least half of all states, a process projected to be concluded before the year ends.