Political differences hold up India's biggest tax reform

By Sujoy Dhar

KOLKATA, India (Reuters) - For India's Finance Minister Arun Jaitley a nationwide goods services tax (GST) is a transformative idea that cannot wait any longer. But he will have to do some more spadework to get states on board if he is to introduce it next April.

While support has broadened among states for the sales tax, differences persist on key details, in particular pitching the tax at the right level to offset possible revenue losses.

A government-appointed panel has suggested a standard GST rate of 17-18 percent. But India's states are reluctant to accept it.

On Tuesday, Jaitley met his state counterparts in a renewed attempt to forge a compromise. The meeting, however, failed to achieve a breakthrough.

"There is no consensus on the rate," said Parminder Singh Dhindsa, finance minister of the state of Punjab. "We want a detailed study to ensure there are no revenue losses."

State finance ministers will meet again in the second week of July to break the deadlock on the measure that, two years into Prime Minister Narendra Modi's term, remains blocked in the upper house of parliament.

Jaitley has threatened to take the GST to a vote in July's monsoon session of parliament.

SILVER BULLET

Investors have billed the GST as a "silver bullet" for Asia's third-largest economy that would supplant multiple federal and state levies - a chaotic structure that inflates costs for businesses.

Jaitley calls it the biggest reform since 1947 that would for the first time create a single market for one-sixth of the world's population and could boost the rate of growth by 2 percentage points.

For the measure to become a reality, Jaitley needs not only the backing of states but also of the opposition Congress party to secure the required two-thirds majority needed to pass a key constitutional enabling amendment in parliament's upper house.

But pleasing one runs the risk of antagonising the other.

For example, the GST is globally known as a consumption-based tax, but Jaitley has agreed to allow states to impose a 1 percent additional levy on the cross-border transport of goods. This proposal is anathema to the Congress party.

The Congress, the original author of the tax reform, wants the proposed levy to be scrapped - a position the government-appointed panel has also backed. States are ready to forgo the tax, provided Jaitley offers higher compensation from the national budget.

The principal opposition party has also asked for capping the GST at 18 percent and setting up an independent mechanism to resolve disputes on revenue sharing between states.

"GST is not like magic," said West Bengal finance minister Amit Mitra, who has been tasked with building a consensus among 29 states. "Step by step it progresses."

(Writing by Rajesh Kumar Singh; Editing by Robert Birsel)