Finance minister P Chidambaram has managed to reach out to states on their concerns about the goods and services tax (GST), which forms a key component of his reforms agenda. The sooner the Centre can roll out a uniform tax, the gains from a common market across the country — estimated as adding 1.5% to the gross domestic product — could help nudge the economy back on the rails. The states have three issues. One, they have not been compensated for partly phasing out the central sales tax. Two, they want some flexibility in setting rates. And they have reservations about a proposed disputes settlement authority. Mr Chidambaram may find it difficult to get states on board a new tax system when the economy is on the skids and has shown considerable political acumen in working around the points of difference.
Bihar deputy chief minister and chairman of the empowered committee on GST Sushil Modi thus came away from a meeting with Mr Chidambaram last week with a clutch of concessions. States will get more compensation, although finding the money this year may be difficult for the finance minister. The Centre is open to a floor tax rate with a narrow band within which states can set their part of the impost. And disputes can be settled within the GST Council, which will have representation from both the Centre and the states. Mr Chidambaram expects to convince state finance ministers of the steadfastness of his purpose and the flexibility of his approach at a meeting on November 8. He hopes to get the Constitution amendment bill changing the tax powers of the Centre and states vetted by a parliamentary standing committee before tabling it in the winter session of Parliament.
It would be optimistic to expect the bill, which needs to be cleared by two-thirds majority in Parliament and subsequently ratified by half the states, will be enacted within six months. If Mr Chidambaram pulls it off, the subsequent GST bill will have to be vetted by committee before being tabled and passed by Parliament. Then the states will have to enact their individual laws. It is unlikely that the entire process can be squeezed into a year. At best, the uniform tax will roll out around the time the country goes in for general elections in 2014. Mr Chidambaram’s urgency over the GST is thus entirely warranted. He wants to get opposition to the tax behind him before electoral politics comes to preoccupy governments at the Centre and the states. Once the legislative process is initiated, he can reasonably expect the tax will see the light of day. If not in what is left of this government’s tenure, then at least in the next one. That should be some satisfaction for a tax reformer.