GST - Central Government to offer compensation to state

Dated 23rd December, 2014

The central government will offer a tapering compensation package to states for introducing the goods and services tax (GST).

Compensation to the extent of 100 per cent of notional losses will be met for three years. It will be reduced to 75 per cent in the fourth year and 50 per cent in the fifth.

Union Finance Minister Arun Jaitley said the tapering package would ensure adequate growth in revenues for the states from the day the new tax measure kicked in. Anyway, the states will actually gain revenue through GST because of economic buoyancy.

Earlier, the introduction of VAT saw most states experiencing a tax buoyancy with producer states, especially Maharashtra, Karnataka, Gujarat, Tamil Nadu and Bengal, gaining the most.

The finance minister told members of the consultative committee on finance here today that in a bid to ensure that states do not lose out after GST, they can charge a 1 per cent additional tax on all inter-state commerce in goods, in addition to the compensation offer.

"It is proposed to levy a non-vat able additional tax of not more than 1 per cent on supply of goods in the course of inter-state trade or commerce," Jaitley said.

While this tax on the supply of goods will be levied for two years, its duration may be extended if recommended by the GST council.

Jaitley assured the members of Parliament that there would be no revenue loss. He said as the volume of trade expands and growth momentum picks up, every state will benefit with the rise in their revenue collections.

Members also suggested that the central government brings out a "white paper" with details on revenue allocated to the Centre and states.

Members also suggested that the Finance Commission be made a permanent body for the allocation of funds to states.

Jaitley said GST would be beneficial to the Centre, states, industrialists, manufacturers, the common man and the country at large since it would bring more transparency, better compliance, increase in GDP growth and revenue collections.