Introduction of the goods and services tax (GST) is likely to be a reality soon, with some opposing

States coming around

“GST will be the biggest reform after 1991. As with most things in this country, economic reform is
held up by political differences, but there is good progress these days,” he said. Stating that “politics
has always interfered with economic decisions,” Godrej added, “People’s understanding of growth is
still poor. The idea is that under a socialist regime, no country has done well. So, neither will we. This
has to change.”

GST’s implementation alone would “add 1.5-2 percentage point to India’s GDP growth. It will
provide a tremendous stimulus and can solve several issues like inflation and fiscal deficit,” he said.

Maintaining that there were few problems to GST’s implementation and that “political differences
are delaying the whole process”, Godrej said, “There is a lot of bargaining going on. It is not only for
the Union Government to implement it, but States must address the macro economic problems”.

He pointed out that tax evasion would become difficult once GST is implemented.

“GST will help exports. Tax refunds will be available and it will be across the board. It will boost the
economy’s growth rate,” he added.

Emphasising the role of States in implementing the next generation of reforms, Godrej, who is also
the President of the Confederation of Indian Industry (CII), said he had met Yashwant Sinha of the
BJP to apprise him of the issue.

“We are working to build consensus at both the States’ level and the Centre for their implementation.
Negotiations are going on. I have had a discussion with Bihar’s Finance Minister Sushil Modi. We
have taken the message across to Gujarat, Bihar and Uttar Pradesh, and even some opposing States.
Politics should not come in the way of economic reforms,” he said.

Stating that the implementation of GST “is bound to be a game-changer for India and we have
impressed this upon the States,” Godrej added, “GST is even bigger than the second generation
reforms and would propel the economy to new heights”.

Godrej added that States needed to be convinced about the benefits of GST so that it is introduced
quickly. “People’s mindset can only change with discussions and debates,’’ he added.

nationwide GST is intended to usher in a uniform market for goods and

services, cut business costs and boost government revenues. But several states and the main
opposition Bharatiya Janata Party (BJP) have resisted the proposal.
Here are some key questions regarding the GST:
* HOW WILL THE GST WORK?
The GST is an indirect tax that would replace existing levies such as excise duty, service tax and
value-added tax (VAT). The states and the federal government will impose the tax on almost all
goods and services produced in India or imported. Exports will not attract GST.

Producers will receive credits for tax paid earlier, which will eliminate multiple taxation on the same
product or service.

Direct taxes, such as income tax, corporate tax and capital gains tax will not be affected.
WHAT'S THE RATIONALE?
Eliminating a multiplicity of existing indirect taxes will simplify the tax structure, broaden the
tax base, and create a common market across states and federally administered districts.

At the same time, GST will lower the average tax burden for goods and services companies
that now pay "cascading" taxes on top of taxes through the production process. Reducing
production costs will make exporters more competitive.

WHY THE OPPOSITION?

States are worried they will lose their fiscal autonomy if they cannot impose taxes on their
own. The BJP has said these concerns must be addressed by the government, but Prime
Minister Manmohan Singh has said the resistance is because of political reasons.

WHAT ARE THE PROPOSED RATES?

In the first year, the government proposes two rates -- 12 percent for essential items and 20
percent for others. In the second year, the higher rate would be lowered to 18 percent, with the
goal that both rates converge at 16 percent, split equally between the federal government and
the states.

ARE ANY EXEMPTIONS PROPOSED?

Yes. The GST will not cover goods like crude oil, diesel, petrol and alcohol. These goods are
major sources of revenues for most states.

WILL THE STATES LOSE OUT?

New Delhi will compensate states for potential lost revenue and Finance Minister Pranab
Mukherjee has assured states that if needed, he would sweeten a 500-billion rupee ($10.8
billion) fund that a government panel has proposed as an incentive for the states to buy into
GST.

WHAT HAPPENS NEXT?

The bill will go to a standing committee of parliament, which will make recommendations and
send it back for voting. The government is not bound to accept these recommendations. It is
unlikely the bill will be taken for voting before the monsoon session of parliament, likely in
July.
The bill needs the support of two-third of parliament and the approval of half of India's states.

WILL THE ROLLOUT BE DELAYED?

Revenue Secretary Sunil Mitra has said the implementation is likely to miss an April 2012
deadline. It would be the third such delay.

WHAT IS THE REVENUE IMPACT?

The GST was initially intended to be revenue-neutral but is now expected to increase the tax
take thanks to more efficient collection and increased compliance.

WHAT ABOUT THE ECONOMIC IMPACT?

Implementation of a comprehensive GST would lift India's economy of over $1 trillion by
between 0.9 percent and 1.7 percent, on top of whatever growth would otherwise be achieved,
according to a report by the New Delhi-based economic think-tank the National Council of
Applied Economic Research.

proposal to introduce a list of categories to be exempted from the service tax is likely to be
announced in the upcoming Budget, but it may fail to give a push to the long-pending Goods and
Services Tax (GST) system.

While allowing the Centre to come out with a negative list for services, the states — which are
opposing the GST in the current form — made it clear that the Union government not interfere in
their jurisdiction.

The main bone of contention between the Centre and the states on the GST is that the states fear
losing flexibility to alter tax rates in the new regime. Many state governments have used this
power to attract industry investments by offering tax concessions. However, at the moment the
biggest concern of the states is the Central Sales Tax (CST) compensation. States have said talks
on the GST cannot progress until the Centre resolves this matter.

States suggested the formula used for calculating compensation for loss of CST revenue for
2007-08 to 2009-10 be followed for working out the compensation for 2010-11 also. The
Centre’s view is that the compensation was initially envisaged only for three years, and a new
formula should be worked out now.

CST, a tax on inter-state movement of goods, was reduced from four per cent to three per cent in
2007-08 and to two per cent in 2008-09 after the introduction of value added tax (VAT). A delay
in the implementation of the GST regime prompted the states to ask for compensation further for
2010-11 and 2011-12, but the Cabinet has not approved a new formula beyond 2009-10.

The government has made a provision of Rs 12,000 crore in the Budget this year for the CST
compensation. An amount of Rs 2,411 crore has already been released to 10 states for loss of the
CST revenue in 2010-11. The finance ministry proposed to give another Rs 2,500 crore, arguing
some states have increased the VAT rates. But states are asking for about Rs 10,000 crore.

Sushil Modi, chairman of the Empowered Committee of State Finance Ministers, said the earliest
GST can come in is April 1, 2013. States, finance ministry officials and tax experts have lost the
hope of rolling out the GST in 2012-13.

For the GST to be introduced in 2013-14, all issues should be sorted out in the next few months
so that Parliament and state legislatures have time to consider the Constitution Amendment Bill
introduced in the Budget for this financial year. If a consensus is not evolved, the GST rollout
could be indefinitely delayed. As 2014-15 is going to be election year, the GST talks may take a
back seat.

Decisions on vexed issues that will facilitate introduction of the GST — such as flexibility to the states to increase
rates in emergency situation, dispute settlement authority, a floor rate with a band, and above all compensation to the
states for losses made by them on account of reduction in the central sales tax — are nowhere in the picture.
The states specifically asked the Centre to keep certain categories of services in the negative list. These, they
believe, are ones that fall under the states’ domain — such as construction, renting or lease of immovable property,
restaurants, transportation of goods, beauty parlours, health and fitness centres, advertisement, entertainment toll,
betting and gambling. The states do not impose services tax, but tax these services in other forms.

After the success of state-level VAT, then finance minister P Chidambaram had in the Budget for 2006-07 proposed
that the GST would be implemented from April 1, 2010. The government extended the deadline by a year in the
Budget for 2010-11. In the Budget for this financial year, a Constitution Amendment Bill was introduced in Parliament
to enable a roll-out of the new indirect tax system. The Constitutional Amendment Bill for the GST is with the
Standing Committee of Parliament on Finance.

If that panel gives its suggestions in the Budget Session, the government can present the document in Parliament by
the next monsoon session, where it will need to garner a two-third majority. Evolving such a consensus is a
Herculean task, according to experts. The proposals will have to be ratified by legislatures of at least half the states.
The next step will be to table the GST Bill in Parliament, while states will introduce their respective bills in the
Assemblies concerned.

But it is going to be a crucial year for the present United Progressive Alliance government to make headway on the
talks and finalise a structure for the GST. If decisions on all these issues are not taken up quickly, the ruling
government may lose another opportunity to bring in the GST in its regime.