Given the game-changing attributes that the finance ministry says the all-India Goods and Service Tax (GST) will have, it was always a surprise that the finance ministry was being so obdurate when it came to discussing the genuine pain points of various states. Indeed, at one point, it was made out as if the problem was a BJP-vs-Congress one whereas many non-BJP states had serious issues that needed resolving. The states, it is likely, were exaggerating the potential losses from the reduction in Central Sales Tax (CST) in order to get a higher compensation, but this is not the first time this is happening—much the same happened when VAT was implemented, but in that case, the Centre agreed to compensate the states for a certain number of years. Similarly, when mineral-rich states were all complaining of a likely fall in rates, the government needed to think in terms of a certain flexibility—maybe a floor rate instead of a fixed rate or perhaps increased flexibility in terms of enhanced royalty rates on minerals.
Instead of all this, however, finance secretary RS Gujral wrote to the Empowered Group of Ministers (when Pranab Mukherjee was the finance minister) saying that states would not be paid any CST compensation from 2011-12 onwards, and that the compensation for 2010-11 would be restricted to the R6,394 crore that had already been paid. By appointing two separate committees, one for CST and one for GST design, finance minister P Chidambaram has chosen to be both pragmatic as well as fair—the states have genuine issues and the only way GST can move forward is with the states agreeing to this. Considerable progress has already been made in terms of the states agreeing that all but a negative list of services can be taxed, and in setting up the GST network which is the nuts and bolts of the electronic system that will power GST. Perhaps the Centre will also agree to the other demands of the states—to do away with the GST council headed by the FM and bring in place an appellate tribunal to settle tax disputes. This may be the perfect solution, but if the Empowered Group of Minister-system works—and it did give us the VAT—it may be pragmatic to let it be for now, let the GST roll out for a few years, and then take a call on how essential this is.