Sanjay Bhatia, Managing Director at Hindustan Tin Works, works out of Jasola, a suburb of New Delhi. An important part of his company's operations is the manufacture of tin containers. Among his customers is consumer-goods major Nestle, to which he supplies the tins that carry the Milkmaid brand of condensed milk. Hindustan Tin Works, like many other companies, buys inputs from across India and ships them to its factories in Sonepat, Haryana, and Panvel, Maharashtra. To make tin containers at Sonepat, the company buys inputs from The Tinplate Company of India's plants in Jharkhand. Some other inputs are bought from Haryana-based units. A number of his customers are based outside Haryana.
Bhatia's company's operations are typical of many. Often, the chain of transactions that links companies to the eventual consumer is spread across states. What happens if each state treats its borders as sacrosanct and levies taxes on goods manufactured within, but sold outside the state? If Jharkhand levies a tax on inputs sourced from the state, and Haryana seeks taxes on goods manufactured there but sold outside its boundaries? It would mean India, despite being one country, is a fragmented and overtaxed market. In fact, that is just the way it is at present.
To break down fiscal barriers between states and create a common market in the country is the objective of the single most important economic reform today in India. For more than five years, Union and state finance ministers have engaged in tortuous negotiations to usher in the Goods and Services Tax (GST), an attempt to create a common market within the country.
Indian industry wants a transition to GST. "Now, it's more a political issue than economic," says Bhatia. But all of this could change next year, and Bhatia is optimistic.
Satya Poddar, partner at consultancy Ernst & Young, thinks Bhatia's optimism is well founded. In 2010, Poddar helped the Thirteenth Finance Commission to crystallise its position on GST and has often engaged with bureaucrats at both the centre and states on the subject.
According to Poddar, the main reason for a revival of hope is the arrival of P. Chidambaram in the Union finance ministry in August. Distilling his conversations with participants in the talks, Poddar says that in Chidambaram India has a finance minister who is able to engage states more effectively on the subject. Poddar's comments echo what Sushil Modi, Bihar's Deputy Chief Minister, said in October soon after a meeting with Chidambaram. Modi heads the group of state finance ministers who are negotiating a transition to GST with the Centre. "We are inching towards convergence on these (GST-related) issues," he had said on October 25.
The economic rationale underpinning GST has for long been accepted. It is the political support for it that has been lacking. Without political support, there is no hope of adopting GST as it needs a constitutional amendment. It would need not just approval from Parliament, but also the majority of state legislatures. Most of the Indian political parties have to be on board before GST can be rolled out.
This is where Poddar is upbeat. "GST is now perceived a winner (at a political level)", he says.
Looking ahead, Poddar feels that in a best case scenario, the constitutional bill relating to GST can be put to vote by September or October 2013. This assumes the central government and the states are able to agree on a framework for GST in a few months. The year 2013 may then just be a year of positive surprises for the Indian economy.