Are India's states ganging up against Modi over his most significant tax reform?

A NUMBER of states in India are putting pressure on the Narendra Modi government to extend a programme to continue compensation for losses from a goods and services tax (GST) or face a risk of stalemate while trying to simplify the structure further, Bloomberg reported.

The scenario poses a big challenge to the country’s most significant tax reform made in decades.

While states such as Kerala, West Bengal and Chhattisgarh, which are not ruled by Modi’s Bharatiya Janata Party (BJP), have said that they will raise the issue at a meeting of the GST Council later this month, Tamil Nadu and Bihar, which is ruled by an ally of the BJP, are set to back the push as well, Bloomberg said citing sources who spoke on the condition of anonymity.

The states are emboldened to take on the Modi government after India’s Supreme Court ruled in May that the GST Council’s decisions are not binding. According to the report, if the council, which is headed by the country’s finance minister, refuses to agree, the states could unilaterally raise revenue with other taxes.

“This is not an ego tussle between the centre and states,” TS Singh Deo, a minister from India’s mineral-rich central state of Chhattisgarh.

“The idea is to ensure increase in revenue and if it doesn’t happen through the council then it will have to be from other avenues. This was supposed to be ‘one nation one tax’ and not ‘one nation one budget.’”

As per the GST law, the Modi government has to compensate states for five years through June 2022 for ceding their tax-making powers and gaining their backing for the consumption tax.

The programme cost $103 billion over the period. Several states are in favour of continuing this as it has become a key source of income for paying salaries, subsidies and infrastructure development.

The BJP and its allies rule most of India’s 28 states and one of three federal territories that have an elected legislature.