Narendra Modi has suffered a political setback after his party failed to push long-pending legislation to overhaul India’s chaotic system of local and state taxes through the current session of parliament.
The prime minister’s Bharatiya Janata party was forced to refer the legislation to create a unified national goods and services tax, or GST, to parliamentary committee, after failing to muster the numbers to pass it through the upper house of parliament, where the opposition Congress party raised numerous obstacles to the passage of a bill they once championed.
The development raises serious doubts about the BJP government’s ability to fulfil its promise to have the GST in place by the start of the next financial year in April, something that will come as a big disappointment to business groups.
Sonal Varma, chief India economist at Nomura, said the setback was a “reality check” that has highlighted the difficulties Mr Modi faces in trying to overhaul and modernise India’s economy and administrative framework.
“Post Mr Modi’s election victory, there was much more optimism with respect to the speed with which reforms would happen,” Ms Varma said. “This is a reality check against that. Of all the reforms, if there is one which is non-controversial, it is the GST.”
The GST would create a single-rate nationwide system similar to Britain’s value added tax, and is seen by policy makers and business groups as a potential “game changer” for India’s economy, as it would turn the country, with its patchwork of local and state taxes, into a genuine single market for the first time.
Economists say the GST could boost India’s GDP by up to 2 percentage points by simplifying the tax system and potentially lowering the effective tax rate by ending the collection of taxes on tax. The GST would also help reduce India’s protracted transit time for cross-country movement of goods, now dragged out by trucks being stopped, checked and taxed each time they cross a state line within India.
“From a fiscal perspective, from a growth perspective and from a competitiveness perspective, this is supposed to be a game changer,” said Ms Varma.
However, the government’s inability to push the legislation through the upper house this session, which ends on Wednesday, means it will have to wait until the monsoon session, which starts in July.
The delay raises serious doubts about the ability to put the GST in place by next April. Even after parliamentary approval, the law, which will essentially amend the Indian constitution, must be ratified by half of India’s state legislative assemblies.
“The April 2016 date is quite an optimistic timeframe,” says Chua Han Teng, Asia analyst with BMI Research. He said in reality it could take a year or two before the system was rolled out.
The creation of a nationwide GST was initially proposed nearly a decade ago by former Prime Minister Manmohan Singh’s Congress-led administration but the BJP refused to allow the legislation to pass, even though it was said to have few fundamental disagreements with the bill. Now Congress appears to be repaying the favour.
“They are playing politics with the BJP,” Mr Chua said, “but eventually they will come to a consensus.”
The government has also referred its controversial proposed amendments to the Land Acquisition Act to a joint parliamentary committee after facing fierce resistance to the changes from Congress and other opposition parties.
Additional reporting by James Crabtree and David Keohane in Mumbai
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