India's Finance Minister Arun Jaitley wants to introduce a Goods and Services Tax in 2017. Photo: Reuters/Amit Dave
India's Finance Minister Arun Jaitley wants to introduce a Goods and Services Tax in 2017. Photo: Reuters/Amit Dave

India fails to break deadlock on sales tax reform

The long-awaited Goods and Services Tax would transform Asia's No.3 economy into a single national tax system and make life simpler for businesses

December 5, 2016 2:27 PM (UTC+8)

Indian Finance Minister Arun Jaitley’s plan to launch a new national sales tax next April suffered a jolt at the weekend when a two-day meeting with state officials ended without resolving the deadlock on who should administer the tax.

The long-awaited Goods and Services Tax (GST) is intended to transform Asia’s No.3 economy into a single national tax system, boost revenues through better compliance and make life simpler for businesses that now pay a host of federal and state levies.

But a council of federal and regional authorities has been struggling to forge a consensus on how to collect the new tax that will have federal and state elements.

Jaitley doesn’t favor dual agencies auditing and scrutinizing each taxpayer as he reckons multiple authorities could end up acting at cross-purposes. But states are reluctant to cede their turf.

While federal and state finance officials will meet again on December 11-12 to discuss the issue, the possibility of a breakthrough at the meeting was not bright.

“I will keep my fingers crossed,” Jaitley told reporters after meeting his state counterparts. “The day we resolve it, I would say it’s a done deal.”

For the GST to come into operation from April 1, the Indian parliament as well as state legislatures, must pass four pieces of legislation before the end of this year.

Parliament’s winter session is due to end on December 16, but the bills can be brought before it only after the council approves them.

Adding to the uncertainty, some states in the council raked up the issue of compensation for revenues they fear losing following the GST launch as well as Prime Minister Narendra Modi’s crackdown on the cash economy.

Modi’s decision last month to scrap 500 rupee and 1,000 rupee banknotes at a stroke as part of a crackdown on tax dodgers and counterfeiters has left companies, farmers and households all suffering.

Jaitley has agreed to compensate loss-incurring states in the first five years of the new tax regime. But states are now equally worried about the economic fallout of the so-called “demonetization” drive which could hurt their finances.

Under a constitutional amendment that enabled the GST, India needs to roll out the new sales tax by mid-September, 2017 when the old system of indirect taxation is due to lapse.

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