India early on Saturday introduced its biggest tax reform in the 70 years since independence from British colonial rule.
The Goods and Services Tax (GST) replaces more than a dozen federal and state levies and unifying a $2 trillion economy and 1.3 billion people into one of the world’s biggest common markets.
The measure is expected to make it easier to do business by simplifying the tax structure and ensuring greater compliance, boosting Prime Minister Narendra Modi’s economic credentials before a planned re-election bid in 2019.
At a midnight ceremony in parliament’s central hall Modi and President Pranab Mukherjee together launched the new tax by pressing a button, reports Reuters.
“With GST, the dream of ‘One India, Great India’ will come true,” Modi said.
For the first midnight ceremony in the central hall in two decades, Modi was joined by his cabinet colleagues, India’s central bank chief, a former prime minister and major company executives including Ratan Tata.
The launch, however, was boycotted by several opposition parties including the Congress Party, which first proposed the tax reform before it fell from power three years ago.
Former Prime Minister Manmohan Singh – the architect of India’s economic reforms – also gave it a miss.
It has taken 14 years for the new sales tax to come into being. But horse trading to get recalcitrant Indian states on board has left Asia’s third-largest economy with a complex tax structure.
In contrast to simpler sales taxes in other countries, India’s GST has four rates and numerous exemptions.
The official schedule of rates runs to 213 pages and has undergone repeated changes, some taking place as late as on Friday evening.
Many businesses are nervous about how the changes will unfold, with smaller ones saying they will get hit by higher tax rates.
Adding to the complexity, businesses with pan-India operations face filing over 1,000 digital returns a year.
While higher tax rates for services and non-food items are expected to fuel price pressures, compliance is feared to be a major challenge in a country where many entrepreneurs are not computer literate and rely on handwritten ledgers.
“We have jumped into a river but don’t know its depth,” said A. Subba Rao, an executive director at power firm CLP India.
