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RPT-Indian parliament kicks off debate on key tax reform
April 26, 2015 / 10:04 PM / 2 years ago

RPT-Indian parliament kicks off debate on key tax reform

(Repeats Friday story with no changes to text)

By Rajesh Kumar Singh

NEW DELHI, April 24 (Reuters) - India’s parliament began debating a sales tax on Friday that seeks to transform the country into a common market, but experts said compromises made to enlist the support of states risked diluting the impact of the biggest tax reform in decades.

The proposed goods and service tax (GST) would harmonise a mosaic of state and central levies into a national sales tax which business and policy makers hope would boost manufacturing and reduce corruption.

“GST is going to lead to a win-win situation as far as the centre and the states are concerned; it’s going to up India’s GDP and it is going to up India’s revenues,” Finance Minister Arun Jaitley told lawmakers.

The government hopes the lower house of parliament will vote on the bill as early as Monday, after which the upper house would have to pass it.

Then more than one half of India’s 29 states must ratify it before federal and state governments would get equal powers to tax goods and services.

What Jaitley calls the biggest tax reform since independence in 1947 could add as much as 2 percentage points to the growth of Asia’s third-largest economy, and passage would be a victory for Prime Minister Narendra Modi’s nationalist government.

Bringing Indian states on board has been a bruising process, as the tax would curb their policy flexibility. It has been 12 years since the tax was first mooted, and there is still work to be done to meet Jaitley’s April 2016 launch deadline.

STEEP RATE

A council of federal and state finance ministers still has to agree on the GST rate, a senior finance ministry official said, after a government think-tank proposed it be set at 27 percent, well above the global average of 16.4 percent for similar taxes.

Some states want an even higher rate to offset feared revenue losses.

The finance ministry official told Reuters that the suggested GST rate of 27 percent was being reviewed to ensure the final rate was not too high, encouraging tax evasion and causing a political backlash.

“It is an established fact that lower rates improve compliance,” the official said. “A higher rate would defeat the very purpose of the GST.”

India’s federal tax base is a meagre 10 percent of its gross domestic product and, in a country of more than 1.2 billion people, only about 35 million pay income tax.

The International Monetary Fund has urged India to broaden its tax base to put public finances on a sustainable footing.

The decision to move ahead with the new tax could mean a quick legislative win for Modi before a potentially lengthy showdown over another key bill, which the opposition fiercely opposes, aimed at making it easier for industry to buy farmland.

Getting the GST through parliament should be more straightforward, because it was backed by the opposition Congress party while it was in government.

Yet horse-trading with recalcitrant states could end up saddling India with a badly designed tax.

Already the GST will not apply to alcohol, and petroleum products will be taxed separately at first, diluting the goal of simplifying the tax system and cutting bureaucracy.

“All these concessions have been made to get states on board, but they have also made it a GST that is far from being ideal,” said R. Muralidharan, senior director at consultants Deloitte. (Reporting by Rajesh Kumar Singh; Editing by Frank Jack Daniel and Mike Collett-White)

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