India: SISYPHUS REVISITED: Passage Of The GST Bill The First Step Or Just Another Flash In The Pan?

Last Updated: 26 August 2016
Article by Phoenix Legal

Having castigated successive governments for policy paralysis and generally deriding the Indian democratic polity as being beset with problems of bureaucratic red tape and the need for consensus building amongst varied stakeholders and vested interest groups, commentators are now somewhat dumbfounded by the swift political two-step that saw the kinks in the goods and sales tax (GST) bill ironed out practically overnight. While the GST bill had been proposed by different governments, the current government had been unable to push this through, despite the majority of the NDA in the Lok Sabha (the lower house of the Parliament). Through deft maneuvering to create a consensus and enforcement of whip mandates, the efforts of the government came to fruition (and to widespread media attention) over the course of the last week before the actual passage of the bill in the Rajya Sabha (the upper house of the Indian Parliament).

The passage of the GST bill is by no means an end – it is merely the beginning, as the GST bill now has to be passed again in the Lok Sabha to approve the changes made by the Rajya Sabha, and also has to be ratified by at least 16 states. If successful, the process for the actual implementation of the bill will begin, which will require new infrastructure to be created on the ground and will also require the constitution of a GST council comprising of representatives of the centre and the states. Given that a whole lot still remains to be done, the most obvious lines of enquiry are whether the passage of the GST bill is actually as momentous as it has been made out to be, and whether the passage of the GST bill is a sign of things to come.

The passage of the GST bill is a good thing, because it establishes that there is still a great deal of possibility that the government will indeed fulfill the immense promise on which it come into power. It also establishes that the Indian polity is not, as is widely imagined, split across party and ideology lines, and that there is room for compromise and accord (even if it is not unanimous) so as to keep moving (albeit slowly) forward.

It has long been understood that policy making in India is often stuck at the doors of the legislature. In marked contrast to previous sessions, the Indian legislative machine has been working at a scorching pace. According to statistics from PRS India, while the winter session (circa December 2015) saw the Lok Sabha working for 98% of scheduled hours and Rajya Sabha for 51% of scheduled hours, the budget session saw the Lok Sabha working for 121% of scheduled hours and Rajya Sabha for 91%!

Silently in the background, in the monsoon session, the Parliament has already conducted activity on bills that are unheralded but very important. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 was passed by the Lok Sabha on August 1, 2016 and is now pending passage in the Rajya Sabha. Among others, this bill seeks to create a time bound process for a District Magistrate to complete possession over collateral in case of enforcement under the SARFAESI Act, and remit stamp duty payable on transfer of financial assets to asset reconstruction companies. While the former will speed up the process of enforcement and should provide banks another tool in their armoury to deal with delinquent loans, the latter is crucial as stamp duty on transfer of delinquent assets to assets reconstruction companies is substantial, particularly in cases of states that do not have a cap on stamp duty on assignment, and prohibitive stamp duty costs are somewhat considered as a barrier to doing business in the asset reconstruction industry.

The budget session saw the passage of the Real Estate (Regulation and Development) Bill, 2013 by both the Rajya Sabha and the Lok Sabha. This bill had been pending for some time, and had been keenly awaited particularly by consumers as it provides a much needed regulatory structure (and consumer protection measures) to the real estate development industry. The budget session also saw the passage of the Insolvency and Bankruptcy Code by both the Rajya Sabha and the Lok Sabha. This consolidates and replaces existing insolvency and bankruptcy protection laws and establishes mechanisms for time bound resolution of insolvent companies and individuals, and also introduces new measures such as the appointment of insolvency resolution professionals to assist in the insolvency resolutions process.

Similarly the winter session saw the passage of the Negotiable Instruments (Amendment) Bill, 2015 by both houses of Parliament. This bill introduced amendments to the Negotiable Instruments Act, 1881 to amend the definition of "cheque in electronic form" (to introduce the concept of digital signatures), and to clarify the jurisdiction of courts where cases of cheque bouncing can be commenced. This bill replaced a previous ordinance. Importantly, the winter session also saw the passage of the Arbitration and Conciliation (Amendment) Bill, 2015 by both the Rajya Sabha and the Lok Sabha. This bill too replaced an earlier ordinance. These amendments introduced included limitations on the scope of the term public policy (as a ground for setting aside an arbitration order), time bound conduct of arbitration proceedings, and limitations on the nature of interim orders that can be passed by courts.

Recognizing the importance of the Public Private Partnership (PPP) in development of infrastructure, the budget proposed 3 initiatives to re-invigorate this sector: (a) the introduction of a Public Utility (Resolution of Disputes) Bill to streamline arrangements for resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts; (b) the issuance of guidelines for renegotiation of PPP concession agreements which shall consider the long term nature of such contracts and potential uncertainties of the real economy; (c) the development of a new credit rating system for infrastructure projects which emphasizes 'in-built credit enhancement structures' to enable lenders to discontinue their reliance on a standard perception of risk which often results in mispriced loans.

All these measures have not gone unnoticed by the domestic and international investor community. Until the passage of the GST bill, these measures were considered as important but ancillary to the crucial legislative reform of introducing GST, a measure that some estimate can boost India's GDP by 1-1.5%. With the passage of the GST bill, there is renewed hope that, while the pace of reforms is infuriatingly slow, these are, in a sense, inevitable. Specifically, the passage of the amendment to the (Indian) Arbitration and Conciliation Act, 1996 and the Insolvency and Bankruptcy Code have been welcomed by the investor community, as these are much needed reforms and do a great deal to further align India with global standards. Notably, the government has also liberalized foreign direct investment in many sectors such as investment in asset reconstruction companies, defence, and brownfield pharma. As part of these reforms, the government has also announced relaxations in sourcing requirements in single-brand retail, thereby showing that it has the ability to deal with issues that are considered politically sensitive.

The government has been appreciated for reaching out to the opposition and compromising on some of its positions, so as to create a consensus and thus ensuring the near unanimous passage of the GST bill in the Rajya Sabha. There is a general view that with the passage of the GST bill, and the newly acquired momentum gained by the government through its victories in the recently concluded state elections, the phase of legislative gridlock that has defined the Indian policy environment should soon come to an end. Stringent inflation targeting (now formalized by the notification of inflation targets by the government), and the government's adherence to fiscal deficit targets have also boosted investor sentiment. While expectations have been tempered by tapering job growth figures and the negative Index of Industrial Production (IIP) data, as an international investor notes , the government is now moving into the "pay-off stage" where the benefits of its reform measures will become visible.

See: (last visited on August 7, 2016).

While the prevalence of cheap international capital and low crude oil prices certainly helps the government in its cause, these alone would not account for the gradually improving health of the Indian economy. One hopes that the hard-acquired momentum towards pushing through reforms will not be stalled and that it will only become stronger in the days ahead.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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