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Indian Gov't Closer To Implementing GST

by Mary Swire,, Hong Kong

31 July 2015

India's Cabinet has approved a proposal to provide full compensation to states for five years once the long-awaited goods and services tax is installed, in a bid to secure support from opposition parties and states for the reform.

An amendment will be made to the Consitutional Amendment Bill. Its adoption by the upper house of parliament – following its approval by the lower house – is crucial, as it will enable states to tax services.

Previously, the Government had said that it would provide full compensation for three years, 75 percent for the fourth year, and 50 percent for the fifth year. It will now pay full compensation for five years. The center Government has also approved plans to enable states to add a one percent levy on top of the GST on commercial sales.

The deadline set by the Government for the adoption of the GST – April 2016 – is looking increasingly optimistic. Many issues remain to be resolved, including agreeing a revenue-neutral rate (currently proposed to be as high as 27 percent), rates for different goods and services, and place of supply rules. The agreement on compensation, however, is a significant step that could unlock the political momentum necessary to see through the substantial reform.

The proposed GST will represent one of the largest shake-ups of the Indian tax system for decades. By replacing a plethora of indirect taxes charged at state and federal level, the GST is designed to make India's consumption tax system far more efficient, boosting inter-state trade and economic growth.

Proponents of the GST say that the tax will remove obstacles to the free movement of goods and services in the country. As things stand, an interstate transaction is subject to both central sales tax and VAT, while a transaction that takes place in a single state is only subject to VAT. The introduction of GST will also significantly simplify the tax regime, enable exporters to recover input tax, and remove distortions caused by cascading taxes.

The Government still needs the support of opposition parties to pass legislation to amend the constitution, as it does not hold a majority in the upper house, but the latest breakthrough should secure the Bharatiya Janata Party enough support to push through the reform.

TAGS: tax | value added tax (VAT) | sales tax | India | VAT legislation | legislation | trade | services

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