Dual control and threshold are the main issues
Bihar finance minister Sushil Modi no longer being available as the head of the empowered group of state finance ministers that was, to a large extent, driving the move towards goods and services tax (GST) is undoubtedly a setback to the process. Apart from the fact that Modi was acceptable to the group of state finance ministers, he was remarkably positive about problem-solving—he was happy to leave sweating of details to officials as long as the politicians agreed on broad principles—and the biggest positive was that he was a BJP finance minister. Given that the government needs the BJP to cooperate on GST, this was a big positive since Modi would have been in a better position to convince his party’s leadership of the need to support GST.
But Modi’s departure need not be the big setback it is seen as, given that he had set in motion several important initiatives anyway. NIPFP, for instance, has been tasked with coming out with a revenue-neutral-rate for central and state GST. As for the speed at which the negotiations would take place, while Modi had indicated he was ready to speed up the pace if the Centre was able to muster enough of a majority in Parliament to pass the necessary Constitutional Amendment Bill, the fact the prime minister has said GST will be put in place by the next government suggests this can wait a bit. In which case, the more important thing is to address the issues raised by Modi since, in one form or the other, these are the issues being raised by all states/parties. The issue of compensation tops the list and the government has left this task to the Finance Commission—though various state finance ministers complain the proposed GST will leave them in the red, there is no body better qualified to come to a view on this issue, and one way to do it would be to raise the share of Central taxes that is distributed to states. There is then the issue of dual control—it is undesirable to have a few million firms/traders paying taxes to two sets of taxmen, one at the Centre and one at the state, so the political class needs to decide on who the relevant taxing authority will be. The other issue, of the threshold level is even more evocative. Going by the figures Modi put out, the states have around 5 times as many traders registered with them for paying VAT in comparison with those registered with the Centre for excise and service taxes. Reduce the threshold too low, and many traders/SMEs who were outside the tax net will now find themselves in it even though the tax they will yield may not be very high. Once these two issues are resolved—and they need the finance ministry to address them squarely—GST will be on a firmer footing.