'Impact of GST will be known in two years'

It is difficult for a large and diverse country to undertake what is being termed as a game changer among reforms, writes Sushil Kumar Modi.

Updated - September 20, 2016 11:32 am IST

Published - August 04, 2016 02:01 am IST

The journey of financial reforms has been a long one. From MODVAT in 1986, to CENVAT in 2002-03 to service tax, to the value-added tax (VAT), it has been a journey that is culminating in India embracing the biggest-ever tax reform measure, the Goods and Service Tax regime.

It is difficult for a large and diverse country, with such variations in the economic characteristics of its States, to undertake what is being termed as a game changer among reforms. The hurdles are not over yet, with 50 per cent of State Legislatures to clear it, for the constitutional amendment to be completed. The impact of this will take another two years to show on the ground, but the country should not lose patience. When the VAT regime was implemented, for two years, the States incurred heavy losses, after that, every year, most States have seen a 15-20 per cent growth in revenue. The impact of GST will also unspool similarly.

I had the privilege to serve as the chairman of the Empowered Group of Finance Ministers going into the various issues of GST during 2011-13, and want to dispel the notion that it was a reform opposed by the BJP. The States were having their own issues that needed to be resolved, on this matter. Gujarat and Tamil Nadu were manufacturing States, worried about loss of revenue, Congress-ruled Haryana and Akali Dal-ruled Punjab were concerned about purchase tax, while again, Congress-ruled Maharashtra was concerned about octroi, Trinamool Congress-ruled West Bengal, Biju Janata Dal (BJD)-ruled Odisha and NDA-ruled Bihar were worried about entry tax.

Compensation hurdle

The then UPA government, by its own actions, did not encourage the passage of this reform. The Centre then refused to give compensation after two years to the States, and this became the biggest issue in the Empowered Group of Ministers. It is to the credit of current Finance Minister Arun Jaitley that he has managed to soothe all anxieties by talking individually to all States.

In my time as chairman, another big issue that had propped up was of dual control. While 80 per cent of dealers are traders, barely 20-30 per cent are only manufacturers, this became an important sticking point. I spoke to various Chambers of Commerce at that time and highlighted it, and while it still remains an issue, the trust deficit between the Centre and the retailers that existed earlier is not there now.

Among the three objections raised by the Congress on the GST, and their constant reference to the 2011 Bill, let me just say that as far as the appointment of a retired judge as arbiter in the grievance redress mechanism is concerned, most States had opposed the measure tooth and nail and wanted a body like the Empowered Group of Finance Ministers to go into disputes.

The country is on the cusp of its biggest tax reform, the benefits of which will be reaped by the future generations.

(As told to Nistula Hebbar; Mr. Modi is a former Finance Minister of Bihar and had chaired the Empowered Group of Finance Ministers on GST from 2011 to 2013)

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