Is Bihar a UPA state? No, we answer. What about Uttarakhand and Jharkhand? After we agree they had been NDA states till recently, he says they were always favouring GST; then he asks if Maharashtra or Punjab are NDA states. They are not, Modi says, but they are opposing GST—“every state,” Modi asserts, “has the right, and the duty, to protect its revenue base.” Nobody is opposing GST as a whole, whether they are Congress-ruled or BJP but each and every state has certain issues which concern them … not even Gujarat is opposing GST, Modi asserts, it is worried “ki CST ka kya hoga …” Maharashtra is concerned about its R15,000 crore octroi base, Bihar gets R1,500 crore entry tax and West Bengal also gets large sums from entry tax; in general, as far as the loss from the CST phase out is concerned, he says as though addressing a first-grade economics class, states that have no manufacturing base (such as Bihar) have no losses and so are not opposing GST but have other concerns to be addressed, while manufacturing states like Maharashtra and Tamil Nadu stand to lose and so are protesting against the losses from GST. In fact, no state is opposing GST on the whole but a number of states have issue-specific reservations and concerns which they want to be addressed, Modi sums up.
But look at the gains, we persist. Vijay Kelkar has given a revenue neutral rate of 12% for GST—that means instead of an average central excise/service tax of 12% and an average state VAT of 10%, India will have a tax of around half that! The officials, and that’s a term Sushil Modi uses often in his two-hour interaction, if you include the half hour we spent cooling our heels during his meeting, have said the numbers are faulty—NIPFP, he says, has been tasked with coming up with a new revenue-neutral rate. In any case, Sushil Modi takes a sip of his, by now cold tea, leave these subjects to technical people, to professors who understand the nitty gritty, why don’t we look at the broader issue?
What broader issue, we ask, since now that finance minister P Chidambaram has agreed to compensate states, it is obvious the opposition is only political. To his credit, Modi is unflappable. Didn’t he write, in FE, we ask, that the process is moving forward?
Of course he did, and he reiterates, the process is moving forward, but it’s time to take the discussion to the car. It’s a bit of a tight squeeze with Modi’s assistant coming along and the cushion in the middle needs to be removed. The driver gives the cushion to one of us to keep in our lap and, for the first time ever, the mild-mannered Modi gets upset. “Why can’t you leave it in the house, why do you have to put it in the guest’s lap … he will be uncomfortable.”
The offer of compensation is important and restarted the process that had got stuck during the earlier regime, and when Chidambaram became finance minister things started moving faster. Modi, though, is not convinced the Centre has the funds to give as the states haven’t even got the compensation for FY11.
But he is anxious to make the larger point, so concludes this part of the discussion with an example: if we live in Noida, it is a problem getting to the FE office at ITO in New Delhi, but if the salary is high enough, we won’t complain about the travel time, he says. Our travel time has also come to an end, we’ve drawn up into the house where Modi has a party meeting, so we sit in the lawns where someone brings us water, tea and some delicious pedas.
Just to conclude the issue of compensation, Modi says as we wind our way back to Bihar Bhawan in tony Chanakya Puri, near the Prime Minister’s residence, the states are to get the power to tax services in lieu of the Centre getting to tax their VAT base, but no official of the finance ministry has been able to convince the states of how much they will actually earn from this extra power to tax. If Zee TV, he says by way of example, earns R100 from broadcasting revenues, it will pay R8 or R10 to the Centre as service tax—how do you determine what part of this is due to viewers in Bihar and will we get a part of this? But leave this to the “officials”, Sushil Modi uses his favourite phrase again. He wants to move on clearly, not get stuck in the detail—the salary, to use his example, will determine whether states are happy but, as yet, the finance ministry has not come out with a salary figure! They have asked the Finance Commission to look at it, he asks, why should states accept that? So far, Modi says, the ministry has not come out with a compensation formula—it was done in VAT, he says.
The more substantive point, he says, is different; it is of threshold levels and about dual control of the tax base. Under the current system, the Centre doesn’t charge excise for firms who have an annual turnover of less than R1.5 crore; states don’t charge VAT from shopkeepers with an annual turnover of less than R5-10 lakh. If we agree to fix a common threshold of R20 lakh, as the Centre wants, Modi says, this means lakhs of traders who we were to tax will go out of our tax net, and lakhs of small industrialists will get caught up in the Centre’s excise net.
Modi has had a dental appointment fixed while at his last meeting, so we are not invited back inside once we are at Bihar Bhawan, so we conduct the remaining conversation on the driveway of Bihar Bhawan. The Centre, he rattles off figures we have no way of checking at that point, has 1.25 lakh firms who pay excise duty and another 8-9 lakh who pay service tax; the states have 50 lakh traders registered with them—who stands to gain more he asks, in a rhetorical fashion, not even expecting an answer. This is bringing back inspector-raj in a very big way, he says passionately—more than 50 lakh traders paying VAT will come under Centre in GST framework.
Do these traders and small-scale producers want to have to file two different sets of tax returns, to deal with the state inspectors and the central ones? Clearly not. What purpose does this serve anyway, Modi asks. The SMEs who will now be in the central tax net don’t even give much taxes—that’s why they were excluded in the first place. There will be huge protests, Modi says, even if we resolve the issue of who will tax the traders/industrialists.
But why not explain this to the Union finance minister Chidambaram, we ask, since he will understand? Because, Modi grimaces, he is not part of the Empowered Committee (EC) meetings. The ministry of finance is represented by bureaucrats who don’t understand this.
So, we are anxious to conclude because Modi appears in a hurry, will we get GST before the election, and can the EC hurry up the deliberations? The EC can, he says, meet more frequently—there is nothing that cannot be resolved, says the eternal optimist. But the real work has to be done by the Centre first. The government has to get a two-thirds majority to pass the Bill first, then half the states have to ratify it.
Ideally, Modi concludes, the Centre should call an all-party meeting to discuss the issue. There are lots of parties—Mayawati is the leader of one such party—that are important players in the political sphere, but have no place in the EC. An all-party meeting will help resolve a lot of issues such as those related to the the threshold and dual control. Compensation, Modi concludes, is an important issue but is not something the officials can’t work out. As far as the EC is concerned, he says, it has enough time. The GST network needs to be put in place and then states’ tax system need to be harmonised and then tested—in Modi’s scheme scheme of things, GST isn’t going to be a reality in the near future. But, he reminds us, all the balls are in the Centre’s court—if it wishes to advance things, it can, and the EC under him will then do all it can to expedite things. “Right now, the government can’t even pass a Bill that requires a simple majority.” That is the real issue. Modi is not too thrilled with FE’s position on whether Bihar should be given backward status and promises that, the next time around, he will talk about development issues with us.