Gold Silver Reports — The next test will be how quickly India can transition to a system where all goods and services are taxed at the point of consumption rather than production. After a majority of states approve the constitutional amendment, parliament must pass at least another bill to implement the tax. Finally, a newly formed GST council made up of federal and state officials would decide the overall rate, which may vary for different goods .
“The economic benefits won’t come for quite some time,” said Sasha Riser-Kositsky, an analyst at Eurasia Group. “You need a critical mass of states to approve the GST in a reasonable time frame to see any changes on the ground.”
A simplified tax regime aims to ease the transfer of goods across the country and reduce opportunities for bribery. Jaitley has said the step can add as much as 2 percentage points to India’s gross domestic product as tax compliance improves .
Even so, the economic impact largely depends on the details. Major uncertainties include:
The level and structure of the final rate, or rates
How many products like alcohol and petroleum will be exempt
How much revenue states will demand in compensation for lost income
‘The Country is Ready’
Nonetheless, India is now on track to move forward with a reform that had been delayed for years due to political bickering. The main opposition Congress party, which first proposed the GST in 2006, had blocked the measure in the upper house in part because Modi also obstructed it as leader of Gujarat state before he became prime minister .
Modi secured a breakthrough after recent state elections strengthened political parties that supported GST, altering the balance of power in the upper house. He sealed the deal by compromising on several key demands from Congress, including scrapping an additional 1 percent levy on goods shipped out of producing states .
“The country is now ready to embrace the GST,” former Finance Minister Palaniappan Chidambaram, a Congress party leader, told the parliament on Wednesday. “We wanted it to be more perfect. But there can never be a perfect bill.”
If enacted, the tax measure would become the 122nd amendment to India’s federal constitution, which is one of the world’s longest and came into force in 1950. The document includes provisions that go beyond organization of the government, such as exemptions on electricity taxes and the collection of export duty on jute, a fiber used to make rugs and curtains .
“We are late in realizing its importance, but it is coming for good now,” said Raj Kothari, head of trading at Jay Capital Ltd. in London. “This will increase confidence on India.” — Neal Bhai Reports