As per the commitment in its manifesto, the Narendra Modi government is renewing attempts to push forward a key tax reform—the introduction of the Goods and Services Tax (GST). It is trying to bring on board all the states and is striving to address the concerns of each of the states. In this endeavour, the minister of state for finance at the Centre has already discussed the issues involved with the Gujarat finance minister. The Union finance minister proposes to soon discuss the issues with the Empowered Committee (EC).
The Modi government intends to bring in this reform at the earliest because the new tax will not only help remove the cascading of the two VATs (state and Centre) and service tax but will also not entail any tax export through the replacement of central sales tax by the destination-based integrated GST (IGST). It will also reduce production and transactions cost of business and usher in competitive efficiency.
The main agenda for the finance minister would, therefore, be to bring back GST from the zone of despair to hope. It must be asserted that the introduction of GST would not be allowed to affect the finances and the fiscal autonomy of the states. In this context, the Modi government should take note of the following issues.
It is essential that the finance minister instils confidence in the minds of the states that the commitment made by the Union government would always be respected. Such an assertion is important as P Chidambaram, during the regime of the UPA-2, had announced at the conclusion of the Bhubaneswar meeting of the EC that the central government would fully compensate the states for phasing out CST (100%, 75% and 50% compensation for FY11, FY12 and FY13, respectively); this compensation would give the states Rs 34,000 crore. The then finance minister had set in motion the process by providing for R9,300 crore as the first instalment of the compensation in the Union Budget 2013 but for some reason only R1,940 crore was finally released. To instil confidence in the states regarding these assertions of the central government, the new government needs to provide for the CST compensation in the forthcoming Budget.
Design of GST
Consensus needs to be built over the design of GST, taking into account the political economy of a democratic country like India and the autonomy of its states. The broad contours of the design should