India’s march towards an integrated Goods and Services Tax (GST) regime appears to have considerably slowed down since the Union government’s failed attempt to introduce in Parliament a Constitution amendment Bill needed to bring about the proposed reform in indirect taxes across the country. The finance ministry, the chief architect of the proposed GST regime, is nowhere near finding a consensus on three critical issues — the powers that should vest with the Union finance minister, the status of the dispute settlement authority and the treatment of octroi and entry tax under the new system. Several states are not comfortable with the proposal of the Union finance minister enjoying a veto power in the GST Council that will determine the tax rates. In spite of several assurances that the Union finance minister will exercise his veto powers only with regard to the central GST rates, the states are justifiably concerned over the potential loss of fiscal autonomy that they may suffer under the new system. The dispute settlement authority has become another area of controversy. The states are keen that they should be individually entitled to legislate on the creation of such a body, instead of the Centre setting it up through an amendment to the Constitution. This is a demand that is born less out of rational thinking and more out of the states’ deep suspicion about the Centre’s intentions behind creating the authority. Thirdly, there is no clarity on the treatment of octroi and entry tax, now in force in many states and a source of substantial revenue, particularly for municipalities and towns.
These areas of differences are serious and it would be naive to believe that the Empowered Committee of the State Finance Ministers (ECSFM) will be able to resolve all of them at its meeting next week in Goa. The idea of holding the next meeting in Goa, far away from New Delhi, can certainly generate a more conducive climate for fruitful discussion to resolve such differences. However, a mere change of venue alone cannot help make much progress unless the Union finance ministry recognises the heart of the issue that has stalled the progress in GST talks. That problem has arisen from a trust deficit, triggered by the draft Constitution amendment Bill that gave the veto power to the Union finance minister. It is important that the finance ministry must address the concerns arising out of the trust deficit, which the states, ruled by opposition political parties, have exploited to the hilt and converted it into a negotiating game for scoring political points against the Centre.
An opportunity was lost in this process during the monsoon session of Parliament. If the Centre makes the right gestures to bridge the trust deficit, the GST consultations can be back on track. The Union finance ministry must draw comfort from the fact that the basic GST document, finalised by the ECSFM, has received endorsement from most states and even tax experts. There are shortcomings, but the structure is not in conflict with the spirit of a GST regime that, through lower tax rates, broader coverage and a more efficient collection system, will result in a lower tax burden on the people and higher revenue collections for governments. Differences over tax rates and the coverage formula can be resolved through the ongoing consultations even after the introduction of the GST system. The Goa meeting can prove to be a turning point, if only the Centre makes a political gesture there to regain the trust of the states.
