As the Atal Bihari Vajpayee government mounted efforts to introduce changes in India’s indirect taxation system by launching the Value Added Tax to replace Sales Tax in 2001-02, the chairman of the Empowered Committee of Finance Ministers, Asim Dasgupta, an MIT-trained economist and Finance Minister of West Bengal, started to reach out to state governments and trade bodies. The plan was to unveil the new tax on April 1, 2002. But what Dasgupta and India’s Finance Minister Yashwant Sinha hadn’t anticipated was the opposition from Sinha’s own party.
A prominent BJP leader in Delhi warned that “blood would flow on the streets” if the government went ahead. And as the deadline was pushed back by a year — by which time Jaswant Singh had replaced Sinha as Finance Minister — the resistance only grew, especially from BJP-ruled states such as Madhya Pradesh, Rajasthan and Delhi. Singh also had something else on his plate — the Fiscal Responsibility and Budget Management (FRBM) Act, which binds the government’s borrowings. Singh assigned Vijay Kelkar, Adviser to the Finance Minister, to work on the implementation of the new law — which meant raising resources to keep the deficit in check.
Kelkar roped in Arabind Modi, a joint secretary in the Revenue Department, and Ajay Shah, a consultant with the Department of Economic Affairs, for the job. The Task Force on Implementation of FRBM worked out the contours of a Goods and Service Tax, or GST, which would replace state VAT and subsume a range of taxes such as excise duty, service tax, octroi, luxury tax and entertainment tax, leading to a single rate structure and a common market without boundaries.
What stood out in that report was the unique harmonisation of rates between the central government and states, both having the same tax base and common compliance. A 7% rate was recommended for states and 5% for the Centre, making it 12%. VAT had by then been in vogue for over four decades in the West. The other Eureka moment came with the idea of a grand bargain to bring states on board — it was incorporated in the report that was submitted in January 2004.
The government had planned to launch the state VAT on April 1, 2004. By the end of January, however, Singh realised that little had been done by way of preparation and, with polls ahead, it was decided to push the launch back to 2005 — though not before a senior official in charge of VAT in the Finance Ministry had been shunted out!
New Prime Minister Manmohan Singh and Finance Minister P Chidambaram decided to go ahead with introducing VAT on April 1, 2005, and learn along the way. Haryana went first and, after some resistance, other states followed. Meanwhile, the Empowered Committee under Dasgupta was asked to work on a roadmap for GST. In the 2006-07 budget, Chidambaram announced the intention to roll out GST on April 1, 2010.
As the Empowered Committee met states to build a consensus, Gujarat, then led by Narendra Modi, and Madhya Pradesh resisted the proposed new taxation regime fiercely. Meanwhile, the 13th Finance Commission, headed by Kelkar, was mandated to assess the implications of GST. A working group led by Arabind Modi indicated a revenue neutral rate of 12%, at which states would not suffer. The Finance Commission submitted its recommendations on GST in 2009 — they included compensating states for any potential loss, and drew the first outlines of what was to become the GST Council. The first white paper on the contours of GST was also unveiled at this time.
In March 2011, Finance Minister Pranab Mukherjee introduced the Constitution (115th Amendment) Bill to pave the way for the introduction of GST. The Bill was referred to the Standing Committee on Finance, then steered by Yashwant Sinha. Mukherjee indicated to Sinha that he was open to changes, but the veteran BJP leader was unable to persuade his party colleagues — led by the Gujarat and MP Finance Ministers Saurabh Patel and Raghavji — to halt their resistance.
Efforts to surmount hurdles continued after Chidambaram returned as Finance Minister. Sushil Modi had replaced Dasgupta at the head of the Empowered Committee; prior to that, a group led by Nandan Nilekani had begun work on creating the Goods and Services Taxation Network (GSTN), the critical infrastructure for the proposed regime. Chidambaram, however, had little luck — Gujarat, MP and Tamil Nadu under J Jayalalithaa refused to budge from their positions. The Finance Minister’s meetings with BJP leaders in the House, Arun Jaitley and Sushma Swaraj, too made no headway. The UPA was defeated in 2014, and the Bill lapsed.
Once in government, the BJP became amenable to GST. In December 2014, Finance Minister Arun Jaitley introduced a Constitution Amendment Bill, and Lok Sabha approved it the following year. The Bill went to a Select Committee of Rajya Sabha, and the Upper House approved the Bill in 2016. In between, as the Congress-led Opposition expressing serious concern over some provisions of the new law, Jaitley reached out to all political parties and Chief Ministers. He took along Chief Economic Advisor Arvind Subramanian — who headed a group to work out a revenue neutral rate — while engaging with leaders including Chidambaram, Anand Sharma and West Bengal Chief Minister Mamata Banerjee. In September 2016, US President Barack Obama praised India’s policy move in a difficult global scenario.
Jaitley was deft in his handling of conflicting demands — including one during which the Kerala representative threatened to walk out over the GST rate on lotteries, a big revenue earner for the state. By June 2017, multiple rates and other issues had been sorted out, and 26 states had amended laws for the introduction of GST. Revenue Secretary Hasmukh Adhia led an outreach programme, and the GST Council agreed to a July 1 launch. What will be reality at midnight may not be the perfect taxation regime, but it will certainly mark a major beginning.