How India’s GST Deal Was Achieved – By Reuters

By Rajesh Kumar Singh and Manoj Kumar

NEW DELHI – After more than two years of attempts, Indian Prime Minister Narendra Modi has successfully navigated the complexities of securing support for what is considered the largest tax reform in the country’s history.

Recognizing that a direct approach wasn’t yielding the necessary votes for the implementation of the Goods and Services Tax (GST), Modi and Finance Minister Arun Jaitley shifted their strategy this spring, according to government sources.

Their first move was to forge a coalition among India’s 29 state governments to marginalize the Congress party. Despite suffering a significant defeat to Modi in 2014, Congress had managed to block the GST in the upper house of parliament.

Subsequently, Jaitley initiated a series of discussions with Congress leaders, the outcome of which remained uncertain until the last moment. Reports indicate he made concessions, including adopting a clause proposed by Congress for the constitutional amendment required to enable the GST.

"Negotiations occur only when both sides are flexible," noted senior Congress leader Jairam Ramesh. "Both sides approached this with pragmatism."

An aide to Jaitley pointed out that Congress’s growing isolation played a crucial role in facilitating a compromise. The official remarked that Congress found itself in a position where it needed to either reach an agreement and preserve its reputation or risk losing credibility.

The unanimous vote in the upper house to pass the 122nd amendment to the Indian constitution represents a significant milestone; the GST, initially proposed by former Finance Minister P. Chidambaram a decade ago, had been delayed by political strife.

Implementing a unified sales tax across India’s vast market of 1.3 billion people would signal a notable step towards integration at a time when political fragmentation is evident globally, such as Britain’s departure from the European Union and the rise of protectionism in the United States.

The passage of the GST also raises important questions about how a federation like India can successfully implement a standardized sales tax—something that has proven challenging in both the United States and the European Union. This effort will be coordinated through a GST Council that unites the central government and the states.

Although tough negotiations on tax rates and scope are still ahead, the atmosphere around the dialogue has improved, with Chidambaram acknowledging Jaitley’s "friendly and conciliatory tone." This renewed engagement could pave the way for the revival of stalled initiatives from Modi’s earlier tenure, including labor and land reforms.

EARLY STANDOFF

Despite securing the largest electoral mandate in three decades, Modi has faced difficulties in advancing his reform agenda. Although Congress has been reduced to a smaller opposition role, it has effectively resisted key initiatives. As the principal party in the upper house representing the states, Congress blocked the GST and undermined Modi’s land acquisition bill, which had drawn criticism as "anti-farmer."

While this strategy was initially successful, it failed to garner public approval. Congress faced setbacks in state elections and, by June, lost the upper house votes needed to impede the GST further.

Seizing the opportunity, Jaitley focused on winning over the states, with influential regions like West Bengal soon expressing support. In July, he shifted his attention to Bihar while simultaneously rekindling talks with Congress after a hiatus of nine months.

Jaitley assured the states that revenue losses would be compensated for five years during discussions held on July 26, a promise that greatly swayed their support, according to West Bengal’s finance minister.

Recognizing the changing landscape, Congress sought a compromise, and both Modi and Jaitley were prepared to make concessions—such as eliminating a 1 percent tax on goods moving between states—concessions that experts believe would enhance the GST’s effectiveness.

On July 27, Congress submitted a written proposal with revised wording regarding GST dispute resolution between the center and the states. Modi’s cabinet swiftly approved identical revisions later that evening.

When it came time for the vote on August 3, the outcome was a resounding 203 votes in favor, with no opposition. The amendment also passed the lower house unanimously on a subsequent Monday.

In this landmark achievement, Modi described the GST as a "Great Step towards Transformation."