Sushil Modi's exit unlikely to impact GST negotiations

Goods and Services Tax (GST) will not replace India's existing system of indirect taxes till a new union government is sworn in next year. That was what Prime Minister Manmohan Singh told businessmen in Japan last month while on a visit there.

The short point is that regardless of what is happening in Bihar following the break-up of the governing coalition of Janata Dal (United) and Bharatiya Janata Party (BJP), its impact is unlikely to show up in a significant way on the negotiations on the Goods and Services Tax (GST).

Sushil Modi, BJP's deputy chief minister in the erstwhile coaliltion government in Bihar, used to head the states' grouping in its negotiations with the central government over GST. Now that he is no longer a part of the Bihar government, a new leader will be needed.

It was in 2012 that Modi played a key role in reviving talks over GST when he was able to establish a purposeful working relationship with Finance Minister P Chidambaram. Following that, GST talks began to move forward.

Currently, they are at a stage where the harder tasks are resolving differences between states on GST's architecture and getting states to trust the centre to compensate them monetarily in the event of their revenue flow being disrupted during the transition to GST.

GST is an attempt to replace India's existing system of indirect taxes with one that creates a common market and makes businesses more efficient. Currently, companies are taxed separately by the Centre and the states. The states, in turn, do not have a common tax template, making for an inefficient system.

Today, GST's negotiations have come down to a granular level. Therefore, political differences are not as important as differences in economic development. For instance, Gujarat and Maharashtra, ruled by different parties, have more in common than states that may be ruled by the same party. Similarly, Punjab and Haryana, ruled by different parties, but with similarities in agricultural economy, have shared interests.

Shared interests between states, regardless of party lines, are one aspect that mitigate the impact of Sushil Modi's exit on GST. Another aspect which will also work similarly is that negotiations have also moved to areas which are new to India.

For example, taxation of e-commerce deals across state boundaries is an entirely new area where taxation experts arguably play a bigger role than politicians in finding solutions.

One of the questions being debated among states' representatives at GST talks is how to deal with an e-commerce transaction for, say, a book sought by a customer in Delhi, where the company may use its warehouse in Gurgaon to source the book. Now, GST is a tax on consumption. Does Haryana collect the tax as it facilitated the consumption through a warehouse in its territory or should it be Delhi where the delivery was made?

In this scenario, Modi's exit may not be harmful for GST talks as it could have been if the governing coalition in Bihar had broken up a year ago.

GST has a long way to go before it becomes reality. It's only when questions on its architecture have been resolved that the politicians will have to make the grand bargains and build trust to make the final transition.