India's parliament has approved a long-awaited overhaul of the country's fragmented tax system to create a genuine single market in one of the most significant reforms to the Indian economy since liberalization began 25 years ago.
The bill, debated in New Delhi for almost a decade, will amend the constitution to permit replacing the current patchwork of national, state and local levies with a single, unified value added tax system.
Economists believe modernizing India's existing antiquated, inefficient tax system will significantly stimulate the economy, potentially adding 1.5 to 2 percentage points to GDP growth a year.
"It would certainly give a boost [to] the economy, which is required at this critical stage," Arun Jaitley, the finance minister, told parliament during the debate on the amendment.
The new goods and services tax will also help Prime Minister Narendra Modi's drive to promote Indian manufacturing by reducing the heavy burden of cascading taxes — or tax on tax — on locally made products.
"It's a transformative change for the country," said Naushad Forbes, president of the Confederation of Indian Industry and co-chairman of Forbes Marshall, which makes boilers and industrial equipment.
The new regime, in which companies can claim tax credits for tax already paid by their suppliers, is also expected to improve tax compliance, boosting government revenues in the long run. Industry groups say it will be far easier to transport goods between different Indian states, something that at present is a bureaucratic and logistical challenge.
"Business is very thrilled about it and it will add tremendous benefits to the Indian economy," said Adi Godrej, chairman of Godrej Group, a large consumer products conglomerate.