Mechanism needed to compensate states after GST launch: Sushilkumar Modi

Interview with the chairman of empowered committee of state finance ministers

Sushilkumar Modi, chairman of empowered committee of state finance ministers believes that the spirit of collective efforts and cooperative federalism will go a long way in helping the introduction of goods and services tax (GST) in India. In an interview with Sanjay Jog, Modi explains his views.

Centre and states differ on a number of issues on the proposed goods and services tax (GST). What is the present status?
I want to make it amply clear that the states are in favour of the introduction of GST and have been making all possible efforts to see that that it is implemented as early as possible. When such a major tax reform exercise is taken up, neither the states nor the Centre can be singled out for delays. Studies show that time taken in other countries, in particular in federal nations, in the implementation of such major reforms has been much more. In a federal country like ours, differences of opinions between the Centre and the states, and among the states can always be there. However, these differences should not be construed as sign of non-cooperation. States have expressed concerns over fiscal autonomy, revenue loss, extent of compensation, encroachment of their territory. States have also objected to the establishment of GST dispute settlement authority as they are of the view that GST Council headed by the finance minister be vested with dispute settlement powers.

We have crossed a major hurdle as the parliamentary standing committee on finance would start deliberations on the Constitution Amendment Bill 2011 from June 8 and it is expected to prepare its report before the monsoon session of the parliament. Thereafter, the report would be discussed by the central cabinet, which would be followed by discussions with political parties. For the proposed constitution amendment, two third approval is required and also 15% of state assemblies would have to ratify it. If GST is implemented in 130 countries, why not in India. I am convinced that GST will be introduced in the country provided concerns raised by states are addressed properly.

Are you looking at any deadline?
Already 2011-12 and 2012-13 have been passed. I think we are inching towards GST, though not very fast.

Why are states apprehensive about revenue loss?
At the outset I want to tell you, similar concerns were voiced by states at the time of introduction of value added tax (VAT) but the subsequent experience has dispelled such fears. There has been marked improvement in the growth of revenue earned by states. Some states believe that they stand to gain little through the taxation of services. At present, not more than 15% of the total service sector is being taxed and even if a substantial part of the currently untaxed service sector were to tall in the negative list, that still leaves considerable potential for tax yield from the service sector. Manufacturing states like Maharashtra, Gujarat, Tamil Nadu and Andhra Pradesh see major loss while a consuming state like Bihar is not going incur any major loss. These concerns need to be addressed.

Besides, states have made a case that compensation by the Government of India for a short period, say five years, is necessary. The states also feel that an independent mechanism should be developed so that in case they suffer losses, they are compensated without any difficulty. This apprehension of the states is mainly because the experience of getting CST loss compensation from the Centre has not been very happy.