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Sushil Modi's 104-day U-turn on the Finance Ministry

Sushil Modi's 104-day U-turn on the Finance Ministry

Bihar's Finance Minister Sushil Modi, who, in the past had termed the centre's approach to negotiating the Goods and Services Tax rollout as a hurdle, is now praising P Chidambaram's flexible stance.

Bihar Finance Minister Sushil Modi Bihar Finance Minister Sushil Modi
Sanjiv Shankaran
It is hard to believe that Sushil Modi, Bihar's finance minister, could dramatically change his views on the Union Ministry of Finance in just 104 days.

But that is just what he did.

Modi, who, in the past had termed the centre's approach to negotiating the Goods and Services Tax (GST) rollout as a hurdle, is now praising Finance Minister Palaniappan Chidambaram's flexible stance.

"I felt they are very flexible and positive," said Modi, conversing with journalists on October 25 in New Delhi's Bihar Bhavan, a short while after meeting Chidambaram. Modi is the Bharatiya Janata Party's nominee in the coalition government administering Bihar.

Chidambaram took over as finance minister on August 1. Officials say he has brought a sense of purpose to the ministry's approach in dealing with economic challenges.

The new finance minister's approach to GST negotiations led Modi to say that the Centre and states' views on the subject were converging.

Last year, state finance ministers chose Modi to head the group negotiating the transition to GST with the Centre. That transition to GST is an attempt to create a common market in the country through an integrated indirect tax system. Currently, India's indirect taxes are divided into exclusive domains administered by the Centre and states.

For instance, central excise is levied exclusively by the Centre while value added tax (VAT) is imposed only by states. In addition, each state has the exclusive right over transactions in its jurisdiction.

All this makes for an inefficient business environment.

Different studies have come up with estimates of what a transition to GST can deliver in terms of higher economic growth. Depending on the assumptions in the studies, the introduction of GST is expected to increase gross domestic product by 0.9 per cent to 1.7 per cent.

Thus far, negotiations between the Centre and states on the transition to GST have been vitiated by a lack of trust.

Therefore, it was not surprising to hear Modi complain on July 13, after a meeting among states' representatives in New Delhi, on the central government's intransigent approach.

Modi's comments on October 25 are perhaps the most positive development in GST negotiations in a long time. It suggests both sides are beginning to shed their distrust of each other, without which the negotiations cannot be successful.

However, this bonhomie is only a sort of new beginning, if anything. The end is a transition to GST, and that will involve tortuous negotiations over details.

Basic issues such as the list of items that can be taxed under GST and the tax rates are yet to be finalised.

Once that is done, states will have to trust that the Centre will compensate them for a loss of revenue, if necessary, for having surrendered the right to unilaterally levy tax or change the rate.

Rapprochement only suggests progress is possible. Not that GST is around the corner.