The empowered committee of state finance ministers, at its two-day meeting in Bhopal, agreed to tax services based on a negative list to ensure broad-based coverage. It also set a deadline for the computerization of states commercial tax departments, removing two major hurdles for the implementation of the goods and services tax (GST) in India. Services that are part of the list wont be taxed.

Sushil Kumar Modi, deputy chief minister and finance minister of Bihar, who has been heading the empowered committee since July, said that with the GST roll-out missing the 1 April deadline, it may only be implemented from 1 April 2013. Modi spoke in an interview about the way forward for GST, the need for the Centre to address the states concerns and evolving a political consensus on tax reforms. Edited excerpts:

The empowered committee took some important decisions at its meeting that are being considered as a big positive for the GST implementation process. How do you think the Centre should reciprocate to ensure that GST is implemented soon?

The central government should ensure that the states are compensated for revenue forgone due to the gradual phasing out of the central sales tax (CST). It will help in improving the confidence of the states on the Centre.

The Centre should be more flexible. In a country like India, where (there are) so many different states, and economic conditions are very different, you cannot use one stick for each and every state. There are many issues on which the states have a unanimous view, but even they have not been incorporated in the Constitution Amendment Bill.

I have met Yashwant Sinha, chairman of the parliamentary standing committee on finance, unofficially and told him about the concerns of the states. If the standing committee takes care of those issues, then it will be easier for the states to come on board.

States are concerned about a dispute resolution authority. There can be a provision wherein the GST council can itself work out a mechanism to resolve disputes among the states. Another issue is uniform GST rates. There can be a floor rate with a band. I have a personal feeling that the central government will keep these things in their mind. The standing committee will also address these issues.

What is a realistic deadline for implementation of GST?

These things depend on many things. It requires a two-thirds majority. The central government should take a political initiative. It should meet important political parties and they should also be taken on board. Whatever issues were there have been expressed by the state governments. I cannot comment on the time frame. But 1 April 2012, is impossible. It should not be brought in between also as some experts have suggested.

Even the IT (information technology) infrastructure is not ready. For a successful GST roll-out, a robust IT infrastructure is needed. Though the empowered committee had given its nod for setting up a GST network, it is yet to get a cabinet nod. It will take around eight-nine months for the network to be in place after the cabinet gives its nod. So 1 April 2012 is ruled out. It cannot be brought in between. Then naturally we will have to wait for 2013.

State finance ministers will meet Union finance minister Pranab Mukherjee on 18 January for pre-budget discussions. What are your demands?

We will request the central government to pay the CST compensation to the states. Besides this, the states will raise four issues collectively.

Because of the implementation of the Sixth Pay Commission, the state governments had to bear a heavy burden. The central government should help the state governments, especially in payment of arrears which run into crores of rupees.

The second issue is VAT (value-added tax) on imports. The state governments will request that they be allowed to levy VAT on imports.

The third issue that will be raised is on centrally sponsored schemes. We want the number of centrally sponsored schemes to be brought down and that funds should be made available directly to the states, so that the states can formulate schemes depending on their requirements. Even the B.K. Chaturvedi committee had recommended that the number of centrally sponsored schemes be brought down from 130 to 30.

The last issue is that central government directly gives funds to state societies or districts rather than giving it to the state governments. For example, under the Sarva Shiksha Abhiyan, state education societies get funds directly. That does not get reflected in the states consolidated funds.

Have state tax collections started feeling the effects of a slowing economy?

Maharashtra said that it is likely to be affected in the coming months by the economic slowdown. But the poorer states or north-eastern states, or states like Bihar and Orissa, were never affected by the economic slowdown much. If there is an impact, it will mainly be felt in the manufacturing states such as Gujarat, Maharashtra and some other states.

Till now, VAT collections have grown at around 20% and not shown signs of a slowdown. But we are also scared as we feel that the euro zone crisis could also affect state revenues. Mainly the southern, western and northern states may feel some impact in the coming days.