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Trust deficit between Centre, states has reduced on GST
May, 13th 2013

who leads the state finance ministers’ panel on the proposed goods and services tax (GST), said there are still some issues, such as states not losing any revenue, before the regime that seeks to convert India into a common market can be implemented. Recent measures taken by finance minister P. Chidambaram have removed the trust deficit between the central and state governments and the remaining problems can now be resolved through discussions, said Modi, a Bharatiya Janata Party leader who is also Bihar’s deputy chief minister. Edited excerpts from an interview:

Have tensions eased between the Centre and the states in the past few months?

I don’t think there was any tension but there was a trust deficit. Then Chidambaram became the finance minister and announced a sub-committee on GST design and CST (central sales tax) compensation. He then accepted the report of the sub-committee giving compensation due to states for the three years 2010-11, 2011-12 and 2012-13. Because of this, the trust deficit was removed. The finance minister has provided Rs.9,000 crore in the budget. But the central government should immediately release the funds to the states and take further action for the remaining years.

The Centre has agreed to many of the states’ demands in the past few months, like allowing them to levy rates in a narrow band rather than a uniform rate and doing away with the dispute resolution panel and the declared goods category. Are there any major issues that remain on which the states want the Centre to give further concessions?
Whatever issues remain are issues that can be resolved. The biggest bottleneck is compensation. Once GST is introduced, states will incur losses because of phasing out of CST, removal of the cascading effect and subsuming of all of states’ taxes. States are afraid about their revenues. This is the biggest assurance that the central government will have to give in a formal way for states to accept GST. If the central government feels that there will be no losses to states, then they should have no problem in giving the required assurance to states. The compensation should be arrived through an independent mechanism and should be based on the VAT (value-added tax) formula.

The other issue is dual control. There is a tendency among central government officials to not let go of control. The minute they feel that something is going out of their grip, they don’t want to let go. The small and medium traders should be kept out of dual control of GST. Else there will be lot of protests. Then there are issues like IGST (integrated GST). They are technical issues and more a question of convenience.

You have said that 80% of work is over on GST. But states are unable to arrive at a consensus on the remaining 20% of the issues. Will this become a reason for the delay in implementing GST?

There are issues that are yet unresolved like IGST that will be levied on inter-state movement of goods, the place of supply rules and the revenue-neutral rate. But I don’t know how much time it will take for constitution amendment Bill to get passed. Whatever time it will take, in the meantime all of these issues will get finalized. The central government or the NIPFP (National Institute of Public Finance and Policy) don’t have data to show how much revenue will accrue to each state in the GST regime. For example, when it comes to broadcasting, all the service tax will be paid in Mumbai or Delhi but the consumer is in states like Bihar also. So, how much of this revenue will accrue to states under GST has to be worked out for the revenue-neutral rate to be decided.

It is not only issues between the Centre and the states. There seem to be many issues among states as well, like the threshold level.
All the states have issues because it concerns their revenue. For Haryana, it’s purchase tax, for J&K, it’s special status, for smaller states, it’s about protecting their tax base. No state will allow for losses in revenue. So we have to take all the factors into account when the GST design is finalized.

State finance ministers are planning to go to South Africa in July to study the GST model prevalent there. This follows their trips to Canada and European countries. Why study so many models?

It is always better to learn from the experience of other countries who have implemented GST for many years. One should not commit mistakes that have already been committed. There can’t be a single model and we should take into account all models before finalizing our model. In South Africa, prices came down after GST came in.
What is the feasibility of the Constitution amendment Bill getting passed this year? Will the Bharatiya Janata Party support the Bill?

It will all depend—when will the standing committee on finance return the constitution amendment Bill to Parliament. It is also an election year and it will not be easy. The BJP will support the constitution amendment Bill. There may be issues with the Bill and states may have reservation on some issues. But, where is the question of the BJP not supporting?

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