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GST: Government flexible on states' concerns, breakthrough likely
October, 26th 2012

A breakthrough is in sight for the United Progressive Alliance government's ambitious indirect taxes reform, the goods and services tax (GST), after central government showed willingness to take on board most of states' key concerns including the dropping the controversial dispute settlement authority and compensation for phase out of central sales tax.

"Talks very positive...We are inching towards consensus on most of the contentious issues," Bihar deputy chief minister and empowered committee chairman Sushil Modi told reporters after a meeting with union finance minister P Chidambaram.

The GST proposes to replace the plethora of indirect taxes with one single levy, a system that will help all stakeholders-government, business and consumers-by preventing leakage, cascading of taxes and lowering the incidence of tax. The GST was to be rolled out from April 1, 2010, but has been delayed due to differences between states and the centre.

Chidambaram has identified GST as one of the key priorities and seems willing to walk the extra mile to convince states to move forward that will create a seamless national market. Chidambaram will meet state finance ministers on November 8 to carry forward Thursday's 'amicable talks' with Modi.

"The centre is more agreeable to many of the issues raised by states...Hopefully we will reach convergence soon," Modi said.

However, he said implementation of the new tax would depend on submission of report by the Parliamentary standing committee headed by Yashwant Sinha. The committee is examining the constitution amendment bill that will allow states to tax services and centre to levy tax on goods at retail level.

The CST compensation had emerged as a major irritant with states even threatening to derail the GST process if the issue was not sorted immediately.

States claim they have received only 6,393 crore as compensation for reduction in CST from the centre in 2010-11 against a demand of about 19,000 crore. The CST is collected by the centre and distributed among states. As a pre-cursor to GST, centre and states had agreed to phase out CST from April, 2007 over a period of three years and consequently CST rate was reduced to 3% and then to 2%.

States also had serious reservations on some crucial components of the GST structure including creation of a dispute settlement authority in the constitution itself to prevent deviations in the structure. There seems willingness on part of both the centre and the states to create a mechanism with the proposed GST council, also proposed in the constitutional amendment, itself to settle disputes.

"States felt DSA threatened their autonomy..The centre is agreeable to addressing this concern," Modi said.

But experts caution that an effective dispute settlement mechanism was a must to protect GST the structure from distorting. "Some form of a dispute resolution mechanism between states and the centre is an absolute necessity for an effective GST system to prevent distortions," said Pratik Jain, partner, KPMG.

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