The GST as been in the works for several years now and there are finally some expectations that finance minister P Chidambaram will offer clarity on a revamped GST model on Budget day. Joining me to discuss the GST and what it may look like finally are two of the best known experts on this subject, Satya Poddar, senior tax partner, Ernst & Young and S Madhavan, former indirect tax leader, PwC  and chairman, FICCI Task Force on GST.

Below is the edited transcript of the discussion on CNBC-TV18

Q: The times are interesting. There has been a change of guard at the finance ministry and that seems to have led to a fresh rethink on this entire issue of GST  on where not much progress seems to have been made over the last two-to-three years. The empowered committee of state finance ministers and the finance ministry seem to have had some agreement recently on the key issues.

What are the changes that seem to have been agreed upon? While the final fine-print is still awaited, what can you tell us at this stage?

Poddar: The biggest change has been that the two sides – the states and the Centre are back to the discussion table. Before Chidambaram there were no discussions of any nature. The changes that were announced a week ago can be divided into three broad categories.

First, there were a lot of technical anomalies or disagreements about the Constitutional Bill about what powers the states will have and the GST design. All of those issues have now been resolved. For example, the dispute settlement authority that was to be created in the Constitution has been dispensed with.

The decision-making process now is quite different rather than having unanimity of all the governments and the Centre which was an impossible goal to achieve now has a rule that you require three-fourths majority but the Centre will have one-third of the votes.

Q: Reflecting on the political structure for a country, it is not possible to have one single unitary political system in place at any given point of time.

Poddar: This is a good balance. Neither the Centre nor the states can make unilateral changes in the design of the GST. So the Centre needs close to 50 percent of the states to go along and the states need the Centre to go along with any decision. So this is a good balance.

All of those things about the Constitutional Amendment Bill and the powers have been sorted out. They have agreed to include petroleum products in the scope of the GST within the Constitution. It may still be outside the GST, but within the Constitution, it is now permissible for the Centre and the states to levy the GST on petroleum products.

Q: That’s a very important point that you clarified that while the statute or provision maybe in the Constitution, the actual working architecture may not actually enforce it.

Poddar: The second biggest change is regarding the agreement on compensation to the states. States were basically demanding a ransom that they will agree on the GST implementation if and only if the Centre agrees to pay them compensation for the loss of revenues from the Central Sales Tax (CST). The Centre has agreed.

The third biggest issue was the design of GST. There, the biggest breakthrough that has come- the Centre was initially insisting on a uniform GST model in all the states from day one. Following the visit of the empowered committee to Canada and Japan, it has agreed on a Canadian model where the states can opt out of the GST on day one if they want to. This is the way the value-added tax (VAT) was introduced.

Uttar Pradesh, Tamil Nadu and few other states did not come on board for the VAT in 2005 when it was introduced. But now that’s the model that they have adopted. States are allowed the flexibility because some states, if they don’t like GST, can stay outside as opposed to blocking everybody else from going along.

Q: Madhavan, I want to ask you about three separate issues – one, the changes to the Constitution Bill, two, doing away with the powers of the Centre are concerned and the issue of compensation and finally, the aspect of design. Let’s take each of these first as far as design goes. What do you make of the changes? Is this enough, is this a half-way house or is this the best solution that could be arrived at?

Madhavan: The third aspect is probably the most appropriate in the sense that there is a widespread desire for the GST to be implemented. Are we going to work towards the perfect or an ideal GST or do we sort of have a GST which is workable given the ground of realities in India and try and sort of refine that model over time?

So I think the way I have seen the discussions at the empowered committee and the recent deliberations in Bhubaneshwar has been essentially to try and get a consensus in terms of how might the GST be rolled out as soon as we could. That is how we have sort of arrived at the design, the redesign GST, if you will.

Q: So is the redesign a political compromise by any means?

Madhavan: For sure. From a practitioner or a GST-design standpoint, you wouldn’t think that this present dispensation is the ideal one.


Q: What would have enabled the Centre to change its stance from where it said, “Look here, this is what I am going to give you on CST but unless you go ahead and get the Constitution Bill cleared, the CST compensation is not coming forth”. What has changed and why has it changed?

Madhavan: I think the FM suggested to the empowered committee that, “Look, at the central level, I will be flexible in terms of CST compensation,” which you know has held up the discussions on the GST for a long time.

Q: But I would ask you a counter question on that. This current finance minister and this administration have just 18 months left in power. Why would the states lay their bets on a government which is soon going to go into elections?

Madhavan: From the states’ standpoint, what do they stand to lose? They would want to engage with the dispensation at the moment. Eighteen months or a week is a long period, in politics.

So they would rather that they would engage with finance minister who they believe they can do business with and if the CST compensation is agreed, bear in mind, they already are asking for 50 percent of the compensation for the three years 2010-11, 2011-12, 2012-13 to be paid upfront keeping in mind that it’s a 100 percent, 75 percent and 50 percent of the computed losses on account of the CST reduction from four to two percent.

They are asking for 50 percent of the likely amount to be paid upfront. So why would the states not engage with the federal government regardless of the fact that 18 months down the line there is an election?