Reforms in the indirect tax regime have always generated opposition from states that fear their revenues would be hurt by a uniform policy. Even in the case of GST, states like Tamil Nadu, Madhya Pradesh and Chhattisgarh (the latter two are ruled by the Bharatiya Janata Party) are vehemently opposed to its nation-wide introduction. K. Anbazhagan, the finance minister of Tamil Nadu, for instance, feels it's premature to rush through with the GST regime by April 2010; the state government fears that the fiscal autonomy of states would be eroded by the tax.

“The roadmap towards GST must be carefully chalked out based on consensus and not compulsion,” says Anbazhagan. According to him, the central government should work out fair and revenue-neutral rates for states. Hasty moves “will not inspire confidence among the states regarding a fair GST regime,” adds the minister.

But Mukherjee says that GST would be introduced in financial year 2010-11, even if some states opt to stay out of it initially. When Value-Added Tax (VAT) was introduced in 2005, many states, including Uttar Pradesh and Tamil Nadu, chose not to implement it. However, gradually all the states accepted VAT and are implementing it now.

While admitting that it is going to be tough to implement the scheme from April 1, Mukherjee says “I know there is a problem. As in VAT, some states did not join us.” But Asim Dasguta, the chairman of the empowered committee of state finance ministers (and the finance minister of West Bengal) has assured him that efforts would be made to resolve the differences among the states.

At present, indirect taxes in India include the central excise duty (imposed on manufactured goods), service tax, central sales tax and VAT. Additionally, many local bodies impose octroi on goods that enter a city. There is a plethora of taxes from the factory gate all the way to a retail outlet. The multiplicity of tax rates results in evasion and corruption.

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THE indirect tax system in India has failed to keep pace with the changes in the Indian economy. The manufacturing sector, which once dominated the economy, today accounts for less than 25 per cent of the gross domestic product (GDP). The services sector has shot up to over 50 per cent, though there are many services that are still not taxed.

The central government earns about Rs1.7 trillion (nearly $35 billion) by way of excise duty and service tax. This revenue is shared with the state governments. The government decided to implement the GST system to remove barriers between states and fiscally unify the country.

An expert committee suggested the introduction of GST way back in 2001. The objective was to do away with the multiplicity of taxes at the central and state levels, to avoid double taxation and to modernise the system. GST is being projected as a win win situation, both for governments and for businesses.

While tax rates would be lowered, overall revenues are expected to rise sharply. According to Vijay Kelkar, chairman, 13th Finance Commission, who laid the roadmap for implementation of GST, implementation of GST would result in an immediate gain of Rs730 billion in tax revenues, besides raising employment and expanding the GDP.

Kelkar notes that Canada's GDP rose by 1.4 per cent after the implementation of GST. “In India we can expect a similar kind of positive impact,” says Kelkar. “This means gains of about $15 billion annually.”

GST, unlike excise duty or sales tax, is a consumption-based tax, and producing states such as Tamil Nadu and Maharashtra fear that they would be the ultimate losers. Many governments have over the years extended a series of tax exemptions, to attract manufacturers to set up plants in their states, especially in the backward regions. Under the GST regime, all such exemptions would be nullified, which could result in many of the industries relocating to the industrial belts of developed states.

Aware about these concerns, the central government is willing to make a lot of concessions. “States and union territories might incur considerable revenue losses in their bid to accept execution of GST and it would be the responsibility of the finance commission to protect such losses by providing them with compensation packages in order to advance implementation of a flawless GST regime,” says Kelkar.

The central government envisages a single GST rate of 17 per cent, with nearly half (eight per cent) being allocated to the states. The government also plans to bring in the construction and real estate sectors and even Indian Railways within the ambit of the GST, to boost revenues.

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THE Federation of Indian Chambers of Commerce and Industry (FICCI) believes that implementation of GST, along with the opening up of foreign direct investment, will provide a major boost to the fast moving consumer goods (FMCG) sector in India.

The $25 billion FMCG sector could be a significant beneficiary of the GST regime, as there would be lower tax rates, uniformity in taxation and virtually no harassment in the movement of goods across the country. It is estimated that the industry can touch $43 billion by 2013 and almost $75 billion by 2018, thanks to these reforms in the tax regime.

Besides the opposition from a few states, the central government itself has to hasten the legislative process to introduce GST. For instance, the Constitution will have to be amended and several existing laws will have to be tinkered. A constitutional amendment requires the support of two-thirds of the members of both the upper and lower houses of parliament.

Considering the refusal of some states to toe the centre's line, it will be difficult for the government to push through with these amendments.

The legislative process in India is extremely slow, with members of parliament preferring to set up standing committees to examine the changes.

Of course, the government faced similar problems while introducing VAT in 2005. It took several years for it to iron out the differences and ensure its nationwide implementation.

And despite the introduction of VAT, there is no uniformity in the tax rates across India. Last week, about 5,000 retailers of mobile phones in Maharashtra went on a daylong strike, protesting against the state government's move to raise VAT on cell phones from four per cent to 12.5 per cent.

Most other states in India impose VAT of only four per cent on mobile phones, but Maharashtra - the largest market in India, with sales of 12 million handsets out of a total of 120 million sold in the country every year - decided this month to jack up the rates to boost its revenues.

“Maharashtra's mobile traders have been one of the most successful and significant channels for the proliferation of mobility in the state,” remarks Tushar Avalani, president, of the state's mobile trade association.

“As the largest mobile handset market in India, the state's contribution to the industry, government and consumers is undisputed. A regressive step like this will severely cripple the growth of organised mobile retail trade in the state, in addition to leading to a resurgence of grey channel.”

According to Pankaj Mohindroo, president, Indian Cellular Association - a body representing handset manufacturers - the move will help grey market operators, who will now start smuggling handsets into the country. The association believes the Maharashtra government move to hike VAT on handsets could render 150,000 people jobless.

Ironically, Maharashtra is ruled by the same United Progressive Alliance (UPA) government that is in power at the centre. Clearly, implementing uniform tax rates across the country is indeed a difficult task.