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India: Taking a Decisive Step Toward Tax Reform

3 MINS READMar 30, 2017 | 20:00 GMT

India has cleared a milestone on its journey toward tax reform. On March 29, the lower house of Parliament passed the four components of the Goods and Services Tax (GST). And since Finance Minister Arun Jaitley introduced the GST as a money bill, it needed the approval of only the lower house, where Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) holds a majority. The vote marked a critical legislative victory for the ruling party and brought India a step closer to forging a unified market that will promote higher economic growth.

Of course, the BJP still has several more obstacles to overcome before India has fully achieved tax reform. First, each of the country's 29 states must pass its own version of the GST — a lengthy process, especially for the state legislatures that the BJP doesn't control. (For that reason, the government will likely miss its July 1 deadline for implementing the new law.) Second, though the measure was initially envisioned to impose a single tax rate, the GST as passed prescribes four rates — 5 percent, 12 percent, 18 percent and 28 percent. Lawmakers have yet to hammer out which items fall under which tax rates, and on March 31, the GST Council — comprising Jaitley and state-level officials — will convene for the 13th time to discuss the matter. Last but not least is the challenge of implementing the new law. Among other factors, the GST's success in encouraging faster tax transactions hinges on the robustness of the GST Network, an IT infrastructure system designed to support the new tax process. The network is part of Modi's push to bring the Indian economy into the digital age, something his government's recent demonetization efforts aimed to do as well. Its development, however, is slow going.

Even so, complications such as these are to be expected in the world's largest democracy, especially considering the reform's scope. And beyond its implications for the tax system, the GST is an important step for India's evolving federalist system. The GST Council, a nonlegislative institution that has served as the primary forum for the central and state governments to hash out their disagreements over the bills, has been key to the reform's passage and could set a precedent for future endeavors. In addition, India's trend toward single-party dominance (currently that of the center-right BJP) helped the government to pass the tax reform. The idea for the GST was first raised in 2000 under then-Prime Minister Atal Bihari Vajpayee. But this is the first time since then that a party has held a majority in the lower house of Parliament. That majority — also a reflection of the shift to the right in Indian politics — made passing the legislation possible and highlighted the emerging interplay between politics and economics in India.

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