Soon after the Fiscal Responsibility and Budget Management Act was notified in 2003, Finance Minister Jaswant Singh wanted to know from senior officials how they planned to go about implementing the new law that bound governments to reducing the fiscal deficit and revenue deficit annually, and meet fixed targets. By then, Singh had got as his adviser former Finance Secretary Vijay Kelkar, who had returned after a stint as India’s representative on the board of IMF. The Minister was told by his adviser and other officials that the key to meeting targets set out in the FRBM law was to pursue a revenue-led strategy — in other words, focus on raising overall revenues rather than cutting expenditure, which would impact development and growth. Singh approved a proposal to form a Task Force for Implementation of the FRBM Act, 2003, headed by Kelkar and with all Secretaries of his Ministry — Revenue, Expenditure and Finance — and the Chief Economic Adviser.
By the end of 2003, with the committee still at work, the NDA government managed to get the Constitution (88th Amendment) Bill through Parliament, which empowered the Centre to tax services. Much work had been completed by that time on the Value Added Tax or VAT, which was first announced years earlier. There was also a project on building a Tax Information Network or TIN. All this was aimed at bumping up India’s low tax base, and its ratio of tax-to-GDP. The committee looked at models such as Canada, Australia and Brazil while it consulted some of the stakeholders. Its advice to the government in July 2004 — by which time Manmohan Singh had become Prime Minister — was to integrate the taxation of goods and services. The way forward, it suggested, was a new taxation system that would be simple, with a low tax rate to encourage compliance, and boost output and efficiency — replacing multiple tax rates across states. The National Council for Applied Economic Research was commissioned to work on a model to make projections across various scenarios.
The Kelkar Committee recommended a single tax rate of 7% for states and 5% for the central government — in effect a 12% rate for most commodities — and recommended an Indian Goods and Services Act that could be effective from April 1, 2005, and which would be consistent with global practice.
It also suggested that the number of tax rates be clipped to 3, with a threshold of Rs 40 lakh for registration. It cited the experience of China, which revamped its taxation law preceding the manufacturing boom that it enjoyed for decades starting in the early 1990s. According to the Task Force, a “grand bargain” was needed to bring states on board — by emphasising that it was a win-win for both them and the Centre, without the tax base of the states getting eroded, and with an agreement on what to tax or exempt.
In his 2005 Budget, Finance Minister P Chidambaram announced his aim, in the medium and long term, to have the entire production-distribution chain covered by a national VAT — or even better, a Goods and Services Tax — encompassing both the states and the Centre. In his next Budget in 2006, Chidambaram said he had set April 2010 as the date for launching GST. By November 2009, the first discussion paper on GST was released by the Finance Ministry. The Ninth Finance Commission headed by Kelkar had, in its report to the government, recommended a grant of Rs 5,000 crore to states, taking into consideration their worries over potential revenue losses. The Empowered Committee of Finance Ministers headed by West Bengal’s Asim Dasgupta, too was at work trying to sort out issues and forge a consensus. Much later, after Chidambaram had moved to the Home Ministry, his successor, Pranab Mukherjee, introduced in March 2011 a Bill to provide the enabling framework for GST. Chidambaram reckons that this draft was the best of what has been introduced so far. But in the face of resistance, the Bill was sent to Parliament’s Standing Committee on Finance headed by Yashwant Sinha, which made out a case for some changes.
As the years wore on, Dasgupta moved out after the Left lost power in West Bengal — and Sushil Modi, Finance Minister of Bihar, succeeded him. By February 2013, when Chidambaram had returned to the Finance Ministry, he provided for Rs 9,000 crore as compensation to states. But the efforts of the government were stymied by some BJP-led states, including Gujarat which was then headed by Narendra Modi. And by May 2014, when the national polls came, the Bill had lapsed — and Arun Jaitley, the Finance Minister in the new NDA government, had to introduce it again. The Y V Reddy-headed Finance Commission that year (2014) in its report recommended a compensation of Rs 50,000 crore to states against potential revenue losses without putting a number on the losses. In the 2015 Budget, Jaitley said the government was keen on introducing GST by 2016.
By May 2015, the government managed to get the Bill approved in Lok Sabha but couldn’t muster numbers in Rajya Sabha. The period was marked by acrimonious exchanges between the ruling party and the principal Opposition party, leading to a long stalemate. It was only in 2016 that the NDA reached out to the Congress on some of its major concerns, and started to work the back channels. On August 4, Chidambaram said he had gone on virtually a “chaar dham yatra” to get the Bill through, but couldn’t succeed.
Getting the law through this time is a reflection of “change with continuity” as Indian policymakers and politicians would say.