Prime Minister Narendra Modi has suffered a setback in his reform agenda after failing to get parliamentary approval for the Goods and Services Tax (GST) this year, meaning his government will bust the April 2016 deadline for introducing a unified tax system in India.
A parliamentary session concluded yesterday with the government unable to introduce the GST Bill in the Upper House, where it needs approval, following protests by the opposition Congress party on other issues. The GST Bill was passed by the Lower House early this year.
"It's been a very disappointing session. Our expectation was that we would get the GST Bill passed," junior minister for finance Jayant Sinha told reporters yesterday.
A delay in implementation, the ruling Bharatiya Janata Party (BJP) admits, is now inevitable. The government now plans to introduce the legislation in the Budget session of Parliament which typically runs from February to May, said BJP leaders.
"We will miss the April 2016 deadline but this is a reform that is bound to happen... I don't think anyone would have any doubts. We have to be able to manage the political contradiction with legislative reforms. This will take time," said BJP spokesman G.V.L. Narasimha Rao.
"It is bound to be passed, it's just a question of timing."
Mr Modi, who came to power last year on a landslide win, has just suffered an electoral defeat in the eastern state of Bihar, where regional parties in alliance with the Congress swept the polls last month.
While the defeat spurred the Modi government to push on more aggressively with its reform agenda, the GST Bill, the biggest reform on the agenda, remains stuck.
According to the government, GST would add up to 2 per cent to the country's gross domestic product by simplifying India's tax structure, as it will replace state level taxes. A multiplicity of state and federal taxes now pushes up the costs of products and services.
Still, Congress and the Tamil Nadu state party, All India Anna Dravida Munnetra Kazhagam (AIADMK), oppose elements of tax.
The government needs a two- thirds majority, which means 164 in the 245-strong Upper House, to get the Bill passed. The BJP and its allies have 63 while the Congress has 68 seats. Smaller parties have the rest.
The Congress has asked that an intra-state tax be scrapped and wants an independent mechanism to resolve disputes on revenue-sharing between states. It has also demanded that a cap of 18 per cent on GST be included in the Bill.
An AIADMK functionary who did not want to be named said the party had reservations about the GST which would cause a revenue loss to Tamil Nadu, a manufacturing state.
BJP, which has had several rounds of negotiation with the opposition, said it would continue to negotiate to get the opposition on board.
Still, analysts said the GST delay would affect investor interest, particularly in the manufacturing sector. Foreign investors want a simplification of the tax system to improve ease of doing business.
"GST is a must for foreign investment in manufacturing, " said Delhi-based consultant Rishi Sahai, adding that passing the Bill is important if foreign investors are to have confidence in the Indian economy.