The recent initiatives and interaction of Finance Minister P. Chidambaram with Sushil Kumar Modi, Chairman of the Empowered Committee of State Finance Ministers, and its members has brought about a thaw in GST (Goods and Services Tax) discussions, which promises to bring greater clarity on the issue.

The Centre’s show of flexibility and softening stand on two contentious issues for States — namely, CST (Central Sales Tax) compensation, and GST design especially related to floor rates and dispute resolution — have helped restart the dialogue on this important tax reform.

It has led to the formation of two sub-committees for thrashing out solutions, one each for CST compensation and GST design, and their reports are expected by December 31, 2012. Though this bodes well for ending the trust deficit between the Centre and State, there is much work ahead before any clear picture on GST implementation can emerge.

First and foremost is the expected introduction of the Constitutional Amendment Bill, after its reference to a Standing Committee, in the winter session of Parliament. Contrary to media reports, sources suggest this is likely to happen as the Standing Committee has completed its interactions with stakeholders and is awaiting comments from the Ministry of Finance. This is an important step as it involves issues such as GST coverage of petroleum and other sectors that need to be resolved for an effective GST rollout.

The passage of the Constitutional Amendment Bill in both houses of Parliament and the requisite State assemblies is a significant milestone in the GST roadmap. Other key milestones such as readiness of IT infrastructure, formulation of GST law and rules merit serious attention in the coming months if the objective is to implement GST in 2013.

The Centre and States should ensure that the GST design is optimal for Indian needs and creates a common market. It should provide maximum coverage, moderate rates to ensure compliance, potential revenues and much-needed competitive advantage to Indian industry. While rates within a band may be a reality in India it’s important that rates for category of goods are consistent across States to create a common market and avoid arbitrage and diversion of trade, which is a bane under the current VAT (Value Added Tax) regime.

Given the slowing GDP growth, industrial production and investment cycles, GST can be one of the important tax reforms that can help kick-start industry, growth and sentiments. The Centre and States should sense this urgency and work towards consensus to implement it.

Having said that, consensus for a reform of this nature in a federal framework such as India’s, with its fragmented and polarised polity, will be an arduous task calling for a lot of patience and political sagacity from all stakeholders.

Harishanker Subramaniam is Partner & Indirect Tax Leader, Ernst & Young

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