India Inches Forward On Major Tax Reform

The Congress-led government and the main opposition Bharatiya Janata Party (BJP) took a small step towards forging consensus on Monday on introducing the country's first ever nationwide indirect tax, a reform seen as a major tool for faster economic growth in Asia's third largest economy.

The government agreed to appoint Sushil Modi, a senior member of the BJP to head a panel on implementing the tax that aims to improve India's meandering tax regime. It is the first breakthrough for the two sides in moving the stalled tax reform forward.

Prime Minister Manmohan Singh has been accused of running a lame duck government, though he recently won some praise from investors and analysts with some bold policy decisions, including raising fuel prices to ease the subsidy burden.

"It now looks as if sharp criticism has shaken them (government) out of lethargy," a research note by Macquarie Equities Research said of India's government.

The government has since its re-election in 2009 failed to make headway on the so-called key Goods and Services Tax (GST) due to opposition among some of the 28 states who fear that they will lose their fiscal autonomy.

The GST is intended to usher in a uniform market for goods and services, cut business costs and boost government revenues. At the moment, a manufacturer who wishes to move goods from one state to another has to struggle with a number of different taxes, as if taking goods across several countries.

The law is as much in focus for investors and the public because it shows the difficulties policymakers have in simplifying India's bureaucratic regulatory landscape, a key obstacle to economic development.

Hurdles Ahead
The law needs to be approved by two-thirds of parliament and half of India's states, hence the need for the government to seek support from the opposition.

The Congress government has in the past accused the BJP of stalling the bill for political advantage. Officials have said the bill would miss its April 1, 2012 deadline.

"Earlier there was a stalemate between the centre and some state governments ruled by the BJP. The process will at least start with this appointment," said N.R. Bhanumurthy, a New Delhi-based analyst.

GST slashes through a maze of local taxes that can be raised or lowered at will by states at present, making life harder for firms navigating in a country of 1.2 billion people with notorious bureaucratic red tape.

Speaking after his appointment, Modi -- Bihar's finance minister -- sought to dispel talk that the legislation had become a political football.

"It is not a political issue," he said. "It has nothing to do with the BJP or the Congress. Even in the BJP manifesto there is GST, but the empowered committee is concerned about states' revenues and other state issues," he added.

But former finance minister Yashwant Sinha, a senior BJP leader who currently heads a separate parliamentary panel on the GST, played down the significance of the appointment.

"No, it does not mean anything of that kind at all," he told Reuters when asked whether the new appointment indicated the opposition party could agree to the tax.

(Reuters)