India’s parliament has passed a historic tax reform that will transform its $2tn (£1.5tn) economy, bringing the country’s 1.25 billion consumers into a single market for the first time.
The goods and services bill, which could come into force by next April, will close tax loopholes and tax more types of businesses, which were previously left unregulated by the old legislation.
It will also mean that Indians will pay less for items such as electronics or motorbikes, while the price of items such as tobacco, fizzy drinks and services such as eating out at restaurants could increase sharply.
The bill, passed by the upper house of the Indian parliament on Wednesday, will give the central government unprecedented powers to set tax rates on goods and services, and streamline the country’s convoluted tax laws into a uniform system.
“You know when you go out to eat in a restaurant in India,” says Amit Srivastava, an analyst from the NGO India Resource Centre, “you get all these different surcharges at the bottom of your bill. That will all become one tax now.”
India’s fiscal system is outdated and only 1% of Indians pay income tax.
For businesses, each state has a clumsy set of tax laws, all handled by different departments, adding unwanted bureacracy and costs to the already cumbsersome tasks of paying and collecting taxes.
Governments have been trying to introduce a national goods and services bill for at least 10 years, but have failed to get the support of parliament.
Prime minister Narendra Modi’s government had already passed the bill in the lower house where his Bharatiya Janata party has a majority. After a day of debates, finance minister Arun Jaitley won cross-party support in the upper house to pass the constitutional amendment needed to wrest tax-making powers away from state legislatures. He said: “This is one the most significant tax reforms in Indian history.”
Jaitley will now need to win the support of 15 of 29 state governments, who could still block the government’s efforts to centralise taxation.
The opposition Congress party, which originally introduced an earlier draft of the bill, argued that the standard tax rate should be set at 17% to 18% and that new tax rates should have to be passed by both houses of parliament, to prevent the executive hiking up taxes “on a whim”. Jaitley has left these specifics of the bill to be debated again in parliament’s winter session.
The bill mandates for a new council made of state and central government representatives to set tax rates. Meanwhile, a complete overhaul of India’s tax system will start as businesses and lawyers scramble to update their systems and knowledge for the new regime.
Tax collectors will need to be retrained, and a new, highly advanced computer programme will have to be created to manage the logistics of collecting taxes from businesses across the nation.