NEW DELHI: The government is likely to bring a separate law detailing the method of compensating states for any revenue loss from the goods and services tax to give a firm assurance to states that their revenues will be protected even if the GST rate is low.
This legal ring fencing could help build consensus on GST rates when the issue is taken up next month, officials said. “Compensation mechanism will be given a legal backing,” said a senior government official confirming some deliberations on the issue. The formula has broadly been agreed to at the first meeting of GST Council on Thursday and Friday, and its nitty-gritty would be finalised before the next meeting by officials.
The constitution amendment to roll out GST provides for full compensation to the states for five years but there are no details mentioned. “Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years,” the amended law says.
A separate compensation law is being mulled that will give the provisions a statutory framework. GST will replace all indirect taxes on goods and services levied by central and state governments. States have in past complained of the Centre going back on its word on compensation for phase out of central sales tax and differences on the issue had hurt the progress on GST for some time. It was only after past dues were cleared that states agreed to move forward on the new tax regime.
The base year for GST compensation is fixed at FY16 but other details like what would be the percentage increase every year over the five year period are to be worked out.
A legally binding compensation agreement will give states comfort to support a lower rate of GST as they would be protected against any loss. The Central government is keen on a lower rate and lesser exemptions though states have pitched for GST rate of more than 20 per cent. A high GST rate would cause inflation.
Credits ET Realty