Former Ruling Party Blocks India Tax Overhaul

Congress delays legislation that would have consolidated India’s various local and state taxes into one national levy.

India’s former ruling party on Tuesday blocked tax reforms that would have made business easier in the country of 1.2 billion. The delay is the first major setback for the conservative prime minister, Narendra Modi, since he won the election last year.

Modi’s Bharatiya Janata Party commands an overall majority in the lower house of parliament but not in the upper chamber where the leftist Congress has most seats.

On Tuesday, the upper house referred back legislation that would have merged various local and state-level taxes into one national goods and services levy — an overhaul Congress previously supported.

Economists say the change could boost India’s economic output by up to 2 percent per year. It would reduce compliance costs for companies and make the transit of goods across the country easier. Now trucks must be stopped and taxed whenever they cross state lines.

The Bharatiya Janata Party has long championed tax reform but refused to support it when Congress was last in power. Now the roles are reversed.

Modi was elected in May last year on promises to liberalize the world’s tenth largest economy and raise living standards. He has made some headway but also run into strong opposition to measures that would weaken workers’ rights and leave national industries more vulnerable to competition from abroad.

T.T. Ram Mohan argues at The Wire that Modi can’t yet take credit for what seems to be an improving economy. Growth is expected to come in at 7.4 percent this fiscal year but only seems higher because the statistics agency recently switched to using 2011-2012 as the base year for its projections instead of 2004-2005.

Inflation is down but that is at least partially due to falling oil prices over which India has no control.

The government has continued fiscal consolidation to bring the deficit under 3 percent of economic output by 2017 while the current account deficit is closing. It has also deregulated diesel prices, substituted cooking gas subsidies with direct cash transfers and raised foreign investment caps in the defense and insurance industries.

But Mohan points out that many other measures investors want remain elusive, including changes in the labor code to make it easier to dismiss workers, a liberalization of land acquisitions and the privatization of state-owned banks and industries.