UNLIKE the bitter battle over introduction of foreign direct investment in the multi-brand retail sector, the United Progressive Alliance government has succeeded in nearly convincing all leading political parties and state governments on the need to introduce the long-awaited goods and service tax in the country.

Finance minister P. Chidambaram recently won over finance ministers of different states, including opposition-ruled governments, on the need to accept the GST regime. A meeting of the empowered committee of state finance ministers, held in Bhubaneshwar in eastern India, agreed to accept most of the major changes proposed in the design of the GST by a committee set up by the central government.

The finance ministers also decided to set up three sub-committees to iron out the differences on the issues of revenue neutral tax rate, dual control of traders and an integrated GST. Of course, Chidambaram had to give in on two crucial counts: compensating states with about Rs340 billion for phasing out central sales tax (CST) and agreeing to delete the contentious clause of setting up a dispute settlement authority.

The BJP-led opposition was reluctant to back the government in getting a constitutional amendment bill passed — necessary for the roll-out of GST across the nation — unless the clause relating to the establishment of the authority was removed. The government had introduced the constitution (amendment) bill, 2011, to introduce GST; the bill is now being examined by parliament’s standing committee on finance.

Chidambaram’s predecessor Pranab Mukherjee — now the president of the country — had not been able to reach a compromise with the state finance ministers, resulting in undue delay in the introduction of the key legislation, expected to transform India’s complicated tax landscape.

Of course, even the BJP is divided on the issue of introduction of GST. While Sushil Kumar Modi, chairman of the empowered panel of state finance ministers — who is with the BJP and the deputy chief minister of Bihar — has been a strong backer of the new regime, his counterpart in BJP-ruled Madhya Pradesh, Raghavji, is a vociferous opponent.

“The deadlock over GST issue is now over,” said Modi. “It is historic as there was a general consensus for introduction of GST.”

While the date for the roll-out of GST has not been finalised, it is expected to take effect from April 1, 2014, just a few months before general elections are held in India.

And as in the case of FDI in multi-brand retail, states have been given the freedom to choose the timing for accepting the GST regime, or even to quit it if they are not satisfied. With Indian states being ruled by different political parties, it has now become increasingly difficult for the central government to introduce a uniform law covering the entire nation.

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THE flexibility that has been built, allowing states to adopt different models and giving them the freedom to set their own GST rates (within a band) was a result of the study tours undertaken by the empowered panel of state finance ministers to different countries.

GST is now in effect in over 140 countries around the world. In the European Union, for instance, rates of value-added tax (VAT) differ among the various member-states. And in Canada, states have the right to opt out of GST whenever they want to. Both these factors were taken into account by the empowered panel when finalising the details.

While finance minister Chidambaram agreed to do away with the dispute settlement authority, the state finance ministers decided to set up a GST council to resolve disputes that could arise in the future.

The central government has also accepted other demands of states including the need for dual GST, with a central and state component. And while the centre has agreed to compensate states by doling out about Rs340 billion for the losses they will incur, they are demanding legal assurances from the Indian government. Modi says the proposed GST Act should have a provision for compensating states for at least five years after they migrate to the new tax regime.

Another major difference was over the issue of petroleum products in the GST regime. The constitution amendment bill proposes to exclude petroleum products and alcohol — two of the most lucrative products for levying of taxes for state governments — from GST. Some state governments also wanted to keep petroleum outside the purview of the GST.

Many tax experts have criticised the central government’s decision to keep petroleum products outside the ambit of GST, pointing out that the government should not exempt any product or service from the new regime.

However, the empowered panel now wants petroleum to be included in the new constitutional amendment and the proposed GST Council be allowed to decide on how to levy taxes on petroleum products.

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THE introduction of GST is expected to bring about far-reaching changes in India’s tax structure. At present, there is multiplicity of taxes at various levels. These include the central sales tax, central value added tax, the state sales tax, turnover tax, and local taxes including entry tax or octroi.

Business lobbies complain of harassment at every tax collection stage, delays in delivering products and services and cost escalation because of multiplicity of taxes. GST will introduce simplification, as manufacturers and service providers will get credit for taxes already paid on inputs across the value chain.

Besides unifying the country in terms of tax, it will remove distortions and eliminate the ‘cascading’ effect of taxes. And besides resulting in lower price of products for consumers, it will also reduce unnecessary tax litigation that is clogging the courts.

GST will cover all stages relating to a good or service, right from manufacture through to consumption. However, a tax credit is available at each stage of the value chain, so the trader gets a set-off on the total tax.

Unfortunately, despite the enormous advantages that GST offers — to governments, businesses and consumers — there has been unnecessary delay in introducing it in India. It was initially supposed to have been introduced on April 1, 2010, but differences between the centre and state governments delayed the roll-out.

The next date that was set was April 1, 2013, but against the deadline has been missed. But fortunately, the UPA government has been able to convince most state governments (including BJP-ruled ones) on the need to cooperate on the issue. The central government has also shown generosity by agreeing to compensate for potential loss of revenue in the initial stages.

While the GST aims to bring about reforms in the indirect taxation regime in the country, the UPA government is also pressing ahead with changes in direct taxation by introducing the direct taxes code (DTC), another legislation that has been delayed in parliament because of differences with the opposition.

Parthasarathi Shome, advisor to the finance minister, recently said that the government would come up with a modified DTC bill after incorporating the changes suggested by the standing committee on finance. The panel, headed by former finance minister Yashwant Sinha — who is also a BJP leader — had recommended raising the annual income tax exemption limit to Rs300,000 as against Rs200,000 proposed in the original bill.