Parliament unites for ‘One Nation One Tax’

India’s Upper House of Parliament has passed a historic tax reform, by approving a simplified tax regime called the Goods and Services Tax (GST) on 3rd August 2016. The creation of a national sales tax is expected to ease the transfer of goods across the country. The passage of the bill is being hailed as one of the biggest legislative reforms for the Modi government, ever since it came to power in 2014.

According to the Finance Minister Arun Jaitley, “This is one of the most significant tax reforms in India in recent history. He added that the enactment of GST will bring about the best in the economic management of the country in its federal form and will empower the states”.

l2016080486661The GST was first proposed in the Union Budget about a decade ago by the then Finance minister Mr. P. Chidambaram. It is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level and is expected to turn India into a single market. The 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.

The new bill is aimed at closing the tax loopholes, tax more businesses and replace complex laws with a uniform system. This would lead to savings in logistics costs from companies across all sectors and improve ease of doing business.  However, the impact of GST could be mixed for companies as some companies will gain more as the GST rate will be lower than the current tax rates they pay, while others are expected to lose as the rate will be higher than the present effective rate. Indians are expected to pay less for items such as electronics or motorbikes, while the price of items such as tobacco, fizzy drinks and services such as eating out at restaurants could increase sharply.

India is currently hampered by a confusing list of state-by-state tax codes that discourage doing business across state borders. A simplified tax regime under GST aims to ease the transfer of goods across the country. Some experts say that GST is expected to improve tax collections and boost India’s economic development by breaking tax barriers between States and integrating India through a uniform tax rate.

The rate of GST is yet to be decided by the government. Industry experts are assuming an 18% rate recommended by a government panel.

Though the GST bill has been passed in the upper house, the main opposition party, Congress which originally introduced an earlier draft of the bill, demanded capping the tax rate at a certain percentage, fearing that buyers may end up paying upto 1/4th of the MRP or even more as tax without such a cap. The opposition Congress party, argued that the standard tax rate should be set at 17% to 18% and that new tax rates should have to be passed by both houses of parliament, to prevent the executive hiking up taxes “on a whim”.

by Ashwani Srisvatva

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