Chidambaram, Modi push raises hopes on GST

The logjam in India's tortuous transition to a Goods and Services Tax (GST) was broken on Thursday when Union Finance Minister P. Chidambaram met with state finance ministers in New Delhi. At the end of the meeting, it was announced that they had jointly come up with a plan to address problem areas.

 The two sides have set December 31, 2012 as the deadline for a solution.

Thursday's meeting held out the hope that India will have a credible roadmap for a transition to GST before the next union budget is announced, early in 2013.

The Goods and Services Tax is an attempt to create a common market in the country through an integrated indirect tax system. Currently, India's indirect taxes are divided into exclusive domains administered by the Centre and states.

Today's announcement was preceded by a confidence building meeting in October between Chidambaram and Sushil Modi, Deputy Chief Minister of Bihar, who represents the states in GST negotiations with the central government. Following that meeting, Modi was upbeat and indicated that Chidambaram was willing to listen to the states.

The solution to break the logjam came about after both sides identified the primary areas of concern.

States, which began reducing their central sales tax a few years ago as a prelude to transitioning to GST, are unhappy with the extent of compensation being offered by the Centre to offset their loss in revenue.

The other area of concern is the GST architecture, as spelt out in the relevant constitution amendment bill, which was introduced in the Parliament in 2010.

At the meeting this afternoon, the Centre and states decided to tackle both issues simultaneously.

To begin with, two committees of officials from the Centre and states will meet and figure out ways to tackle each issue. Thereafter, they will be replaced on both committees by ministers, including Chidambaram, to iron out residual problems.

 Both reports are to be given to the states' body by end of the year, and the body will take a final decision on moving ahead.

Addressing journalists after the meeting, a beaming Chidambaram declared: "When GST should come into force and how it should come into force is really a matter for states to decide and the Centre will be a facilitator."

The recent bonhomie is a welcome departure from the apparently intractable differences that have delayed enactment of the GST.

Over the last two years, the two sides have talked past each other on the tax, leading to state finance ministers repeatedly using the term "trust deficit" to explain the logjam in negotiations.

On Thursday, Chidambaram went out of his way to reach out to the states. To begin with, he went over to New Delhi's Vigyan Bhavan annexe, where the state finance ministers had gathered, to listen to their concerns.

After the meeting concluded, Chidambaram, flanked by Modi and S.S. Palanimanickam, the Minister of State for Finance, went out of his way to undo the impression that the union government talked down to states.

 "I am extremely happy and satisfied by the progress today," he declared.

The transition to GST is expected to make industry more competitive and eventually reduce the tax burden on consumers by dismantling the cascading of taxes on goods that cross state boundaries.

As Chidambaram put it: "We are creating a common market for India."