Opposition states are still trying to extract extra compensation, so India will not get the benefit of much lower GST-based taxation before the elections. But, once it is implemented, states that are not on board will find their manufacturing edge blunted in a big way

In many ways, the goods and services tax (GST) is standing where it was in 2009 with states, largely Opposition-ruled ones, continuing to remain intransigent. However, in terms of the ground work, a number of contentious issues associated with this critical tax reform have been resolved including that of compensation to the states for any revenue loss. Nevertheless, even in the most optimistic scenario, GST is unlikely before 2016-17.

What needs to be done to implement GST and when is it possible realistically from here?

First of all, the government has to create a political consensus for getting the Constitutional Amendment through in Parliament for empowering the Centre and the states to handle GST?the government needs two-thirds majority in Parliament, and ratification by half the number of states.

Once the Constitutional Amendment Bill is passed, the Centre is required to get GST Bill approved from the respective assemblies for the same. Experts believe the process could almost certainly take a year or even more.

What is the Centre doing?

The Centre has succeeded in improving the atmosphere for GST implementation significantly since the time P Chidambaram took over as Union finance minister in August last year. The most contentious issue of compensating states for any revenue loss on account of GST has receded in the background with Chidambaram agreeing for it. The Finance Commission will provide the formula for compensating states for that. The Centre is currently drafting the GST Bill and is also trying to cobble a political consensus for a Constitutional Amendment. The Centre is also looking at a flexible GST which allows states to opt-in only when they are ready – a similar model was used in the case of the value added tax (VAT) and several states opted to join in only later. The work on IT backbone, a nation-wide network to handle GST is also being done to keep the platform ready for its implementation once all the approvals are in place. A committee headed by Nandan Nilekani is looking at this critical requirement. Though there appears to be a broad consensus on GST now with the Centre amenable to accepting their demands, states like Madhya Pradesh still have strong reservations which might delay it further.

Is the opposition largely political?

Though the opposition to GST is coming mostly from the NDA states, there is no doubt that states do have apprehensions on losing their autonomy and loss of revenue. Demands for keeping petroleum products and alcohol out of the GST ambit reflects these concerns. The states don?t want to part with their power to garner additional taxes from these items due to GST. But given how the states will now be able to tax services, which could theoretically raise their taxable base dramatically, it does appear states are harping on revenue losses without looking at the potential growth in tax revenues. Some states are also looking at basing the compensation at the 4% central sales tax (CST) level while others are okay with a compensation based on a 2% CST level.

How is the compensation to be decided?

The Centre has agreed to compensating for revenue losses and this would be done on the basis of the formula which the Finance Commission will prescribe. In the scheme of things currently discussed, the states will have opt-in or opt-out option from GST.

What is opt-in/opt-out option?

The empowered committee of state finance ministers discussed the option of allowing the states to opt-out of GST so that those states not willing to be part of the new tax regime could be out of it. That option seems to have disappeared practically with the Centre ready for compensation. Moreover, it would not be beneficial for the states to be not part of GST once it is in place.

Why will states opt-in?

Loss of business, therefore revenues, will force the states to join GST rather than being out of it, as it happened in the case of VAT. The VAT regime started with a few states and then all other states joined in due course. Take a simple case, if a TV is being assembled by a company in a particular state A with the help of parts produced in state B which has not opted for GST, it is obvious the company will not get the benefit of the taxes paid in state B and it will shift its business from state B to the other state which is under GST. This will force state B to join GST and this is the reason why the opt-out possibility is more or less discounted now.

Will the GST rates be uniform?

The revenue-neutral GST rate will be the last element to be decided in the GST framework. The National Institute of Public Finance and Policy (NIPFP) has been entrusted with the job of suggesting a revenue neutral rate (RNR). It has, however, been decided that once a commodity has been put into a basket?say, toothpaste in the list of standard items?it will be taxed at the same rate, though the possibility of some flexibility has not been ruled out. While petroleum products, alcohol and cigarettes are out of the GST, a dual-GST formula is still being discussed?under this, a part of the duty can be set off while one part cannot. Real estate transactions are also to be kept out of the GST right now.

How does this affect GST?

The more the items in it, the lower the RNR. Just including real estate in GST can help lower the effective GST rate by 2-3 percentage points.

What was the RNR of the Vijay Kelkar Committee and why was it so low?

The RNR was 12% as compared to the average excise duty (Cenvat) of 12-13% today and state VAT of 11-12% across states. This was because the states? tax base would rise as they can tax services under GST and they also get to levy a CVD on imports. The Centre also gets to tax a higher base as the exemption threshold comes down and the list of services that can be taxed also grows.