August 8, 2016 / 3:02 PM / in a year

Parliament approves GST, India's biggest tax reform

NEW DELHI (Reuters) - Parliament approved India’s biggest overhaul of indirect taxes on Monday after the Lok Sabha ratified a constitutional amendment Prime Minister Narendra Modi called a major step to make doing business easier.

Truck drivers walk out of a Commercial Taxes Department check post after getting clearance to cross a checkpoint with their goods at the Chavadi checkpoint on the outskirt of Coimbatore, Tamil Nadu, September 5, 2015. REUTERS/Sivaram V/Files

The proposed goods and services tax (GST) is one of the most significant reforms since India opened its economy 25 years ago and the revamping of the tax system since the country’s independence in 1947.

The measure will harmonise a mosaic of state and central levies into a national sales tax, creating a single customs union widely expected to reduce business transaction costs, with potentially significant long-term growth benefits.

The Rajya Sabha, where the measure was stuck for months, passed the bill last week.

Modi hailed the passage of the bill as a “great step by team India, (a) great step towards transformation, great steps towards transparency”.

“Today, an important move to free the nation from tax terrorism has begun,” Modi told lawmakers in the Lok Sabha.

The advancement of the new sales tax is the biggest legislative victory for Modi, who swept to power in 2014 promising to nurse India’s then faltering economy back to health.

His plans to simplify rules for land sales got scuttled in parliament last year. Similarly, political opposition forced him to put on hold proposed legislative changes aimed at making it easier for companies to hire and fire workers.

It has been 13 years since the tax was first mooted, but forging a political consensus has been a bruising process, as the measure would curb the powers of Indian states.

Ironically, the GST is getting closer to the finish line under Modi, who while running the state of Gujarat vehemently opposed it - a fact that drew criticism from opposition benches.

Modi defended his stance, saying his experience as a provincial chief helped him better understand and address states’ concerns.

“Lots of flaws have been overcome as far as the GST is concerned,” he said. “A trust between the centre and states has developed.”

Under the new regime, companies will get offsets for taxes paid at different stages of the supply chain, mitigating the dangers of double-taxation.

The finance ministry aims to roll out the GST from next April. Meeting the self-imposed deadline, however, will be a race against time, tax experts say.

The bill now needs the approval of half of India’s state legislatures and central and state legislatures must pass three laws to implement the tax.

Reporting by Rajesh Kumar Singh; Editing by Tom Heneghan

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