The landmark Goods and Services Tax (GST) bill passed by Parliament recently is a legislative accomplishment by Prime Minister Narendra Modi which even his harshest critics cannot not dismiss, a top US expert has said.
"Modi, stung by the criticism that his government has not done enough to reshape India’s economic landscape, has notched a legislative accomplishment that even his harshest critics can’t easily dismiss," Milan Vaishnav of Carnegie Endowment for International Peace wrote in an op-ed in Foreign Affairs journal.
"The triumph gives his government newfound momentum at exactly the right time. Early campaigning has already started for January’s regional elections in the pivotal state of Uttar Pradesh, home to 200 million Indians. Due to the timing and political importance of the poll, many will interpret it as a mid-term verdict on the Modi government itself," he said.
According to the expert, the promise of the GST is it will provide a common operating system through which the states and New Delhi can harmonise the current maze of indirect taxes on goods and services, such as jurisdiction-specific excise, value added, luxury, and entry taxes.
The GST will levy a tax on the value-added at each stage of production, but it will also provide for offsetting tax credits for every purchase from the point of manufacture to the point of consumption, he wrote.
Under a "destination-based" rather than "production-based" tax, consumers are only responsible for the tax levied by the last actor in the supply chain.
This intricate system will be managed through a single online interface for tax registration, compliance, and credits, he noted.
Vaishnav said the GST will not only align India’s taxation of goods and services with the practices of most nations, but it will also provide domestic and international firms the uniformity and the predictability they need to do business.
However, for all the dazzling, potential benefits of a GST, the new regime still faces daunting political hurdles, he said.
Now that both houses of parliament have acted and passed the bill earlir this month, a two-thirds majority of at least half of state legislatures must ratify the law.
"Next, a GST Council comprised of central and state government representatives will need to be established; this body will be responsible for drafting a model GST law that parliament and all of the states must pass.
Crucially, the council must set the all-important "revenue neutral rate," or the tax rate which preserves the current level of revenue enjoyed by the center and the states," he said.