India's sales tax stuck in deadlock

The long-awaited goods and services tax would transform India's economy into a single market, boost revenues and simplify life for businesses.
The long-awaited goods and services tax would transform India's economy into a single market, boost revenues and simplify life for businesses.PHOTO: BLOOMBERG

Federal and state authorities unable to agree on how to collect levy, even as year-end legislative deadline looms

NEW DELHI • Indian Finance Minister Arun Jaitley's plan to launch a new national sales tax in April next year has hit a speed bump after a two-day meeting with state officials ended without any progress made on who would administer the tax.

The long-awaited goods and services tax (GST) would transform Asia's third-largest economy into a single market, boost revenues through better compliance, and simplify life for businesses that now pay a host of federal and state levies.

But a council of federal and regional authorities is struggling to forge a consensus on how to collect the new tax, which will have federal and state elements. Last Saturday's drawn-out meeting ended without resolving the deadlock between the various authorities.

Mr Jaitley is not in favour of dual agencies auditing and scrutinising each taxpayer because he feels multiple authorities could end up acting at cross-purposes. But the states are reluctant to cede their turf.

Federal and state finance officials will meet again on Sunday and next Monday to discuss the issue, but the chances of achieving a breakthrough are not high.

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

For the tax to come into operation from April 1, Parliament as well as state legislatures must pass, in all, four laws before the end of this year.

Parliament's winter session is due to end on Dec 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 will be lost following the GST launch as well as Prime Minister Narendra Modi's crackdown on the cash economy.

His move last month to scrap 500-rupee (S$10.40) and 1,000-rupee banknotes as part of a crackdown on tax dodgers and counterfeiters has left companies, farmers and households all suffering.

Mr Jaitley has agreed to compensate loss-incurring states in the first five years of the new GST regime. But the states are now equally worried about the economic fallout of the "demonetisation" drive, which could hurt their finances.

"All states are deeply concerned about their revenues falling," said West Bengal finance minister Amit Mitra. "Compensation in future may become huge."

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

REUTERS

A version of this article appeared in the print edition of The Straits Times on December 05, 2016, with the headline 'India's sales tax stuck in deadlock'. Print Edition | Subscribe