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Indian GST Takes Step Forward

by Mary Swire,, Hong Kong

22 July 2011

The Indian government has appointed Sushil Modi, a senior member of the Bharatiya Janata Party (BJP), to head a panel to look at implementing the single goods and services tax (GST). It is thought that the main opposition party is now in a position to considerably influence the introduction of this indirect tax.

Finance Minister Pranab Mukherjee has been persevering for a considerable length of time with his plans to roll out the GST. He has, however, faced obstacles from the BJP and the states, which have been concerned about a loss in their revenue and worries that the tax reform will give too much power to the federal government. This has been despite the Finance Minister agreeing to fully compensate states' losses.

The states have been asking for flexibility in the event of possible floods or droughts, so that they do not have to rely on central government handouts. Coal producing states have been asking that coal is GST exempt, and there is also concern about the dispute settlement authority proposed.

It is believed that Modi’s leadership will be crucial to get all the states on board with the tax, and on the announcement of his appointment he said that he would try to achieve consensus for the tax reform.

He denied that the legislation had become a political issue, saying: “It has nothing to do with the BJP or the Congress. Even in the BJP manifesto there is GST, but the empowered committee is concerned about states’ revenues and other state issues.”

The law will need to be approved by two-thirds of parliament and at least half of the country’s states.

If implemented, the GST will be imposed by all states and the federal government, and will replace existing levies such as central sales tax, state sales tax, entertainment tax, lottery tax, electricity duty, stamp duty and value-added tax (VAT). The tax will be collected on goods and services at each stage of sale or purchase in the supply chain, and there will be a tax credit mechanism set in place. The end consumer, as the last person in the supply chain, will bear the final tax.

The government hopes that introducing GST will lead to a corruption-free tax administration, and an increase in tax income because of more efficient collection and increased compliance. It has been estimated that India could gain USD15bn a year as a result of increased exports and employment.

It is expected that the committee will meet in August to discuss the next steps on GST reform.

TAGS: tax | business | sales tax | India | law | goods and services tax (GST) | legislation | tax reform | retail | services

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