That the government’s tax reforms programme has hit a roadblock is evident from the fact that it now has no fresh deadline for the launch of a national goods and services tax (GST). It was in 2008 that Finance Minister Palaniappan Chidambaram first set April 2009 as the date for GST rollout. The government failed to meet that deadline. His successor, Finance Minister Pranab Mukherjee pushed the target date by a year. The government missed that target too. A fresh deadline was set for April 2011. With ten weeks to go, everyone in the Union finance ministry and outside is now certain that a GST will not be in place by that date. And no one is willing to set a new date. A new taxation system aimed at imparting greater efficiency and ease of collections and compliance is, therefore, clearly on hold.
Ironically, Mr Mukherjee had made substantial progress on the GST front until about July 2010. The empowered committee of state finance ministers on GST had put out a consultation paper on the new architecture of the proposed indirect taxes regime, which had received general endorsement even though experts and purists had many objections to some of the suggested provisions. More importantly, the government was all set to table the legislative Bill on introducing the GST in the monsoon session of Parliament. What derailed that process was not the imperfections in the proposed GST regime, like its coverage and the number of tax rates, but the more substantive and political question of whether the new system would rob the states of their freedom to have their say in the fixation of GST rates. The bone of contention was the constitution of the GST Council, where the Union finance minister’s veto power meant that in matters of dispute, the states would have had to submit to the Centre’s wishes. The Union finance ministry did make some conciliatory gestures to dispel the states’ apprehensions, but there was no resolution of the dispute and the result was that the government failed to present the GST Bill in the monsoon session.
Clearly, Mr Mukherjee’s leadership has not helped boost prospects for tax reform. Evaporating political support for the new taxation regime was evident when just eight state finance ministers attended the last meeting of the empowered committee held in December. The way forward is critically dependent on the Union government’s ability to dispel the apprehensions expressed by dissenting states like Uttar Pradesh, Tamil Nadu and those ruled by the Bharatiya Janata Party. Undoubtedly, apprehensions over GST are politically motivated and there are no strong economic arguments against it. GST has now become a political challenge and the government should meet it with a political response, without further diluting the economic principles behind the new tax system. The dissenting states are also aware of the long-term benefits of being part of a GST regime and are likely to soften their stance once the Union finance ministry makes conciliatory gestures to address their grievances. The Centre, therefore, should recognise this and make the right moves to end the stalemate and push for reform.
