Indian states on Thursday committed to work on a model tax legislation that will be passed by state assemblies, confirming the eventual roll-out of the long-awaited goods and services tax (GST) regime.

The decision, which came after a meeting between state finance ministers and Union finance minister P. Chidambaram in New Delhi and two weeks after states and the Centre arrived at a consensus last month in Bhubaneswar, is another significant step towards the roll-out of the tax that will create a unified market.
States had held out on account of differences over the design of GST and payments in lieu of losses arising from a reduction in central sales tax (CST), which will eventually be phased out with the introduction of GST.
The move to a unified tax is widely perceived as a reformist move, and tax experts, consultants and executives have claimed that the introduction of GST could add significantly to the growth of the country’s economy.
On Thursday, Chidambaram assured states that the government will make provisions in this year’s budget to provide for CST compensation; due to fiscal constraints, the payment will be staggered with a provision being made this year for only the dues of 2010-11.
The finance minister also assured the states that in case of a further delay in GST roll-out, they will be provided adequate compensation for revenue foregone. States have asked that either they be paid full compensation from the fiscal year starting 1 April 2013 or the CST rate be restored to 4% (it is now 2%).
The Centre agreed that the states will be given 100%, 75% and 50% of the compensation figure arrived at on the basis of the guidelines agreed on 22 August 2008, for the years 2010-11, 2011-12 and 2012-13, respectively. This is estimated to cost the exchequer around Rs.34,000 crore. States had demanded Rs.19,000 crore for 2010-11, of which only around Rs.6,000 crore has been paid by the Centre.
All states barring Madhya Pradesh also agreed that a Constitution Amendment Bill will have to be passed to usher in GST.
“If GST has to be brought in, we require a model legislation which will have to be passed by state assemblies. The empowered committee of state finance ministers will draft the model law for states in consultation with the central government,” said Sushil Kumar Modi, chairman of the empowered committee of state finance ministers and also the deputy chief minister of Bihar.
Chidambaram is likely to outline the constitution amendment required in the budget.
In addresses to foreign investors in late January during international roadshows, Chidambaram had said that the government hopes to have the revised Constitution Amendment Bill tabled in the monsoon session of Parliament and get it passed by the winter session. A constitution amendment has to be cleared by a two-thirds majority in Parliament and by a majority of state assemblies.
In the last meeting of the empowered committee of state finance ministers in Bhubaneswar, the Centre had acceded to most of the demands put forth by the state governments, ensuring a breakthrough. The implementation of GST, which seeks to remove all barriers among states and economically unify the nation, has been delayed from its initial roll-out date of 1 April 2010 because of various points of disagreement between the Centre and the states.
The states were also allowed to decide the timing of their transition to a GST regime, besides being given the option to levy a floor rate within a narrow band. The Union government also agreed to do away with the dispute resolution authority. It was also decided to include goods such as petroleum products under GST. The Centre also gave its nod to the proposal to give states powers to raise additional resources during a natural calamity or disaster.
On areas of disagreement such as GST on imports, levying of integrated GST on inter-state trade, a revenue-neutral rate and the issue of dual control, both sides have agreed to set up subcommittees with representatives from the Centre and the states. These subcommittees will submit their reports in three months.
“It is a positive step that states have now started thinking about the legislation for implementing GST. This will ensure that now whatever issues arise in the GST roll-out, they will be ironed out,” said Bipin Sapra, a tax partner at audit and consulting firm Ernst and Young. “Once the Constitution Amendment Bill is passed by Parliament and the majority of the states, the states will have to pass legislations for GST to supersede existing state VAT (value-added tax) laws and to facilitate levy of service tax by states.”