India will adopt a Goods and Services Tax and move towards a unified tax market that analysts say will improve investor confidence in the country's economy.
In one of the most important pieces of economic legislation introduced by any Indian government, Members of Parliament voted 203 to 0 in favour of a constitutional amendment for a GST to be implemented, replacing the current complex tax structure where each of the 29 states and the federal government have their own set of taxes.
That had resulted in over a dozen taxes, from local sales taxes to excise and Customs, amounting to 20 to 40 per cent of levies on products.
In a rare show of unity, the ruling Bharatiya Janata Party (BJP) and bitter political rival Congress came together to pass the landmark reform after an eight-hour debate in the Upper House on Wednesday.
The Lower House had passed it in May last year, but will have to approve the latest version of the Bill.
The new GST legislation also needs to be ratified by a majority of the state assemblies, while a GST council will be set up. The GST rate will also have to be finalised through another piece of legislation before the government's targeted launch next April.
"Once GST is rolled out, business would be easier. It would help a large body of traders and citizens... it enables free flow of goods and services. The tax rate will come down and many goods will cost less," said Finance Minister Arun Jaitley at a press conference yesterday.
"We are going to try to make it as reasonably quick as possible."
India's economy, which is forecast to grow by over 7 per cent this year, is expected to get an estimated 0.9 to 2 per cent boost from GST.
The GST, which has been in the works for a decade due to a lack of political consensus, will hopefully boost manufacturing, improve tax collection, reduce corruption and increase revenues.
"It is not just one of the biggest reforms of the Modi government, it is one of the biggest economic reforms in the country. It will impact the entire economy," said Mr Rajeev Dimri, leader of indirect tax at consultancy BMR and Associates.
"If we benchmark against the gold standard (of GST) around the world, India is not there. But it is still a huge improvement on the existing system... A certain amount of inefficiencies and artificialities in doing business will disappear."
Unlike in many other countries, India will have a three-layered system with a federal-level, state-level and intra-state tax. Alcohol and petroleum products are exempted from GST for now.
Analysts say the passage of the legislation is a rare victory for Prime Minister Narendra Modi in Parliament. Reforms like the land acquisition Bill were stymied as the BJP holds a majority in the Lower House but not the Upper House. In a bid to pass the GST legislation, the BJP had agreed to a key Congress demand to compensate states for five years for any loss of revenue and drop a 1 per cent additional levy on movement of goods between states.
The implementation of the tax will take as much effort as passing the legislation. The government now needs to train 60,000 state and federal officials for the rollout, as well as those in the business community. It will also need to work on computer systems designed for the new tax. But certain states, like manufacturing-heavy Tamil Nadu, remain wary of the GST regime.
"Many companies remain unprepared for the implementation of GST," said Mr Sachin Menon, partner and head of indirect tax at KPMG in India.
"The challenge before many is how to get ready to implement GST before April 1 next year."