GST under a cloud after NDA split

The indirect taxes regime that will unify India into a common market is being reviewed by a panel of state finance ministers led by Sushil Kumar Modi of the BJP, who was deputy chief minister of Bihar. Modi, who was also Bihar’s finance minister, said he will resign from the committee on Monday.

Modi was spearheading the consensus-building exercise between New Delhi and the states on some crucial but unresolved issues. He took over as chairman of the committee in July 2011 after Asim Dasgupta, West Bengal’s then finance minister, had to step down when the Communist Party of India (Marxist) lost the state assembly elections to the Trinamool Congress party.

In his tenure of nearly two years as the head of the panel, Modi is credited with having reduced the trust deficit between the Centre and the states. During this period, the finance ministry under P. Chidambaram agreed to some of the long-standing demands of the states with respect to the design of GST and the issue of payment of central sales tax (CST) compensation.

The Union government agreed to do away with a dispute resolution panel, allowed states to levy rates in a narrow band, and gave them the option to time their entry into GST. The Centre also agreed to pay compensation to states for losses arising from reducing CST as part of its gradual phasing out.

The government will have to now look for a new chairman from among the state finance ministers, preferably from opposition-ruled states, to help in the consensus-building exercise. It will not be an easy task given that some of the BJP-ruled states such as Madhya Pradesh, represented by finance minister Raghavji (he uses only one name), and Gujarat, represented by industry and power minister Saurabh Patel, continue to have reservations on the design of the proposed taxation system.

It is premature to comment on who will be the next head of the panel, according to a state finance minister from a non-Congress ruled state. “It (choosing a new head) will take some time,” he said, requesting anonymity. “Given that the Congress is in power at the Centre, ideally the head of the empowered committee should be someone from a non-Congress state.”

There are options among non-Congress ruled and non-BJP ruled states as well, such as Amit Mitra, West Bengal’s finance minister from the Trinamool Congress, and Prasanna Acharya, Odisha’s finance minister from the Biju Janata Dal.

GST seeks to create a common market for goods and services in India by removing all barriers among states. It has missed its initial roll-out date of April 2010 as the Centre and the states worked on arriving at a mutually acceptable structure of the new regime.

With consensus on key issues evolving, the Union government was keen to bring a Bill to amend the Constitution—required to implement GST—in the monsoon session of Parliament scheduled to start in the last week of July. The administration will need the support of the BJP to get the amendment approved with a two-thirds majority in both houses of Parliament.

The parliamentary standing committee on finance, headed by BJP leader Yashwant Sinha, is expected to submit its report on the amendment in the next few weeks.

Prime Minister Manmohan Singh recently indicated that GST will not be implemented in the current tenure of the United Progressive Alliance’s government, which ends in May next year. This may effectively push the implementation date to fiscal year 2015-16.

“There has been some forward movement in the past few months. Modi being from the principal opposition party also helped,” said Pratik Jain, a partner at KPMG, a consultancy. “The government should quickly appoint a new chief to ensure that the momentum continues.”

Jain also suggested that the empowered committee should be made a statutory body so that changes in a state government does not have an impact on the functioning of the panel.