A ray of hope in GST talks

Sushil Modi, Bihar's finance minister, was on Monday chosen to chair the grouping of state finance ministers negotiating indirect tax reforms, raising hopes that the political gridlock stalling progress may have ended.

Modi's elevation in the grouping was a step forward, but India is unlikely to transition to the goods and services tax (GST) next fiscal, as negotiations on details over the architecture have a long way to go.

Earlier, Finance Minister Pranab Mukherjee said he hoped to see GST roll out on 1 April 2012.

Modi's name was proposed by Delhi's Congress chief minister Sheila Dikshit. Modi is a member of the principal opposition Bharatiya Janata Party (BJP).

Last year, negotiations on GST at the grouping of state finance ministers, or empowered committee of state finance ministers, broke down over allegations by the Congress that the BJP's objections to its proposals was primarily political in nature.

"It (GST) has nothing to do with the BJP," Modi said after Monday's meeting where he was chosen as chairman. "In BJP's manifesto, GST is there," he added.

According to Modi, GST negotiations were influenced by problems of individual states and not by political parties. The Dravida Munnetra Kazhagam, which is part of the ruling United Progressive Alliance at the Centre and was in power in Tamil Nadu last year, had issues with the central government's GST proposal, he said, explaining that BJP-administered states were not the only ones opposed to the proposal last year.

GST is India's most ambitious indirect tax reform. It seeks to create a common market by dismantling fiscal barriers between states. Both the Centre and states would have to give up powers provided by the Constitution to exclusively levy indirect tax in some areas for GST to roll out. The outcomes of the transition to GST are likely to be lower prices for consumers and a better operating environment for businesses.

Modi declined to comment on the deadline. He pointed out that there was a clearly defined process for GST on account of recent developments, and the Centre had a crucial role to play.

In the Parliament's Budget session this year, Mukherjee introduced a bill to amend the Constitution, which would allow the transition to GST. The bill was referred to the Parliament's standing committee on finance. The committee, made up of members of most political parties, will talk to all stakeholders before giving the government its recommendations.

According to A.R. Rather, Finance Minister of Jammu and Kashmir and a member of the National Conference, the current environment was better than what prevailed last year during GST negotiations. Rather said Sushil Modi was the right choice as chairman of the empowered committee.

Rather's optimism notwithstanding, GST negotiations have a long way to go, because of a few technical issues.

Key issues, such as the final structure of the GST mechanism, rates, and dispute settlement, have yet to be finalised. The constitution amendment bill that Mukherjee tabled has a provision for a dispute resolution mechanism that did not find favour with the states.

Another critical issue that is likely to crop up soon is the extent to which the Centre will offset the revenue that states with a large manufacturing base will lose on account of paring central sales tax (CST). CST was reduced from 4 per cent to 2 per cent to prepare the ground for GST.

Bitter negotiations over CST compensation had, in January 2010, led to states such as Gujarat accusing the Centre of vitiating the atmosphere.

Rather was upbeat about the likelihood of meeting the April 2012 GST deadline. But given how much ground is yet to be covered, India is unlikely to transition to GST in fiscal 2013.