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GST bill delayed, peeling away reformist face
August, 10th 2010

India's most ambitious indirect tax reform is at serious risk of missing another deadline following failure so far to win opposition support for a bill crucial for business and public finances.

The Congress party-led coalition government had placed much of its political capital over the past year seeking to pass in the current parliament session a nationwide goods and services tax (GST) bill that would on April 1, 2011 replace existing levies such as excise duty, service tax and value-added tax.

Finance Minister Pranab Mukherjee is reaching out to opposition parties in New Delhi to narrow down differences and will then meet state ministers to find a compromise, a finance ministry official, who declined to be named, told Reuters.

High expectations rest on GST with business executives and investors, hoping it will reduce their average tax burden by eliminating the multiple taxes that pile up, and cut down on corruption and red tape.

By creating a common market across Asia's third largest economy, GST would also eliminate tax variations between states that cause massive bottlenecks for the movement of goods. Improved tax collection would help trim the fiscal deficit to 4.1% of GDP by 2012/13 from 5.5% projected this year.

While few see major economic losses from the delay for now, the episode is emblematic of the slow progress on key reforms and adds to the crumbling of high hopes many had of Prime Minister Manmohan Singh's coalition government.

The Congress party returned to power stronger in 2009 elections, but has since lurched from one crisis to another. While it has taken up some bold steps like freeing fuel prices, other reforms like opening up retail remain on the backburner.

"The government doesn't seem to show a lot of evidence on that count. It does raise concerns about their ambitious fiscal targets," said Brian Jackson, a Hong Kong-based senior emerging market economist with the Royal Bank of Canada.

"It is important that they make progress on improving public finances. If there is hindrance, then it is a concern."

The GST proposal must be approved by two-thirds of both houses of parliament in New Delhi and by half of India's states, numbers the Congress party-led coalition government does not have, making it necessary to bring in rivals on board.

But opposition parties and several states are against a provision that gives the federal finance minister veto powers over decisions on tax rates and on granting exemptions from the tax. States also fret about possible revenue loss, despite the federal government's assurances to make good any shortfalls.

Many feel the resistance stems from main opposition Bharatiya Janata Party's (BJP) desire to keep up the pressure on Congress.

"There is no economic reason for any state to oppose the GST, political compulsions are the reason," Sachin Menon, head of indirect tax at consultancy KPMG said.

"If it is not presented in the (current parliament) session, implementation could be delayed. It may go up to Oct 1."

The Congress has 207 members in the 544-strong lower house of parliament, with allies taking it a little ahead of the half-way mark. In the upper house, it has 71 of the 244 members. The party or its allies control 13 out of 28 states.

Mukherjee has said he will not be a "super finance minister," and the personal push of the man seen as the government's top negotiator is what will probably tip the balance.

"He is able to rally people, he'll bend over backwards to make the states comfortable," Sujit Ghosh, a partner at tax advisory firm BMR Advisors, said. "He will make sure it happens."

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