The Importance of India’s Newly Passed GST Bill

The Importance of India’s Newly Passed GST Bill

On March 29, 2017, India’s lower house of parliament passed the historic Goods and Services Tax (GST) bill. This key legislation was passed after a nine-hour marathon debate in the parliament that has put India’s dream of becoming “one nation, one tax regime” on the accelerated path through this tax reform.

The Finance Minister, Mr. Arun Jaitley, emphasized the decade-long struggle and the efforts that have gone into making this bill a reality. He stated that for the first time the center and the states have come together and showed their solidarity before the GST council to roll it out. The minister also hoped that the bill will drive the nation of more than 1.2 billion people into a single market. He expected a boost of 2% in the economic growth rate. Soon after the bill was passed, Prime Minister Narendra Modi tweeted “I congratulate countrymen on the GST Bill being passed. New Year, New Law, New India.”

The central government aims to put this bill into effect from July 1, 2017; however, to make it happen, the state legislatures will also have to pass their respective state GST bill.  On Wednesday, the lower house passed the following four bills:

  • The central GST bill
  • The union territory GST bill
  • The integrated GST bill
  • The GST (compensation to states) bill

The proposed bill consists of 4 tax rates – 5%, 12%, 18% and 28%. The current system has 2 tax rates at 12% and 18%. However, more clarity is required as to which tax rate is applicable to different categories of goods. While addressing this issue, the finance minister stated that having a single rate would make the GST regime regressive. A single tax rate is likely to make luxury goods taxed at the same rate as the necessary products. Though essential items for daily usage including food will be exempted from tax. Consumers will benefit from the implementation of GST as they will not be subjected to double taxation. Taxes to be imposed on an item will include both central government and relevant state government tax.

Industry wise, this pan-national tax structure is likely to create a common market by removing various existing levies and rates, and minimize the adverse effects of taxes in the manufacturing chain. Particularly, the export industry is set to fetch rich dividends from GST. A report by the National Council of Applied Economic Research reveals that removal of cascading taxes on exports may boost the GDP growth by 0.9% to 1.7%. Apparently, GST is going to pave the way for incoming foreign investment, and also outgoing exports will gain momentum.

Next, these four bills will be presented before the Rajya Sabha (Upper House of the parliament). Since these bills were presented as a ‘money bill’ in the parliament, only the upper house can suggest amendments. Also, suggestions must come within 14 days of the bill to be sent to the upper house. The bill will subsequently be re-submittted to the Lok Sabha (Lower House of the Parliament) which may approve or to reject those changes. This gives the government an opportunity to push these bills before the end of the ongoing budget session in the parliament on April 12.

This key legislation had achieved an overwhelming consensus in the parliament. The critics did highlight some of the possible drawbacks and made few critical comments about the bill. A few questioned the premise that the bill would help in reducing prices of goods and services. While one legislator objected to “anti-profiteering” provision, and even called it draconian that will cause hardships to industry.

Across the industries, by and large, has given the thumbs up to the new bill. Many even hailing it as the single most important tax reform in the independent India that will economically unify the country.

CEO Ragu Bhargava shared his thoughts on GST in a previous article India’s GST: 10 Things to Know where he called it “the biggest tax reform in decades” and advised companies to keep a close eye on this.

The information shared in this article provides general information only, and is not professional advice. Should you need support on international expansion services or have a specific question about India, please contact us at info@globalupside.com or at +1-408-913-9130 to speak to one of our experts.