India’s Goods and Service Tax Continues to Face Delays

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By Ian Bhullar

Jun. 19 – Although implementation of India’s new Goods and Service Tax (GST) continues to stall, recent developments raise hopes that this substantial tax reform will achieve its proposed implementation date of April 2013.

The GST, which seeks to rationalize the indirect tax structure by consolidating India’s complex system of indirect taxes under two goods and service taxes (the central GST and the state GST), is challenged by a divergence of interests between the Centre and states. Since the changes require constitutional amendment to realign state and Centre power, they have been repeatedly delayed.

Sushil Modi, chairman of the Empowered Committee of States’ Finance Ministers that oversees state-level GST preparations, has recently outlined state demands with regard to the GST. Amongst these, state legislators seek flexibility in the tax rates that states can set, especially during emergencies such as floods or droughts; and a dispute mechanism that will not have “legislative supremacy” over states.

Moreover, states are seeking compensation for lost revenue since the reduction of the central sales tax (CST) on interstate trade, which was lowered in anticipation of the introduction of GST. The Centre is facing criticism for its reticence on this, and for providing no commitment to implement GST in the 2012 Budget.

The opening of a set of hearings on GST at the Standing Committee on Finance of Parliament provides some reassurance among this deadlock. The hearings will seek to build consensus amongst states and Centre, actively targeting the standoff largely responsible for the delays. Chairman Yashwant Sinha indicated on Friday that he would like to see the process completed by the Monsoon session of Parliament.

“If things move in the right direction, then by the end of March (2013), the bill can be ratified,” Modi said, reflecting Sinha’s optimism.

Modi voiced hope earlier this month that the constitutional amendment bill will be ratified by the end of March 2013. However, he notes that a lack of movement and an increase in delays in GST implementation have become all too common since the 2007-2008 Union Budget’s initial projection of GST implementation by April 2010.

Now, with the latest developments at the Standing Committee, and with the IT infrastructure for GST already under construction, there is at least some development underway.

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