Centre plans to give 3 years GST compensation for states

Dated 13th October, 2014

Prime Minister Narendra Modi's plan to roll out a Goods & Services Tax (GST) by April 2016 could hit another hurdle, as the finance ministry wants to compensate states for only three years. States, on the other hand, have been demanding that the Centre compensate them, for losses incurred on account of switching to the proposed indirect tax regime, for five years.

Also, the ministry has ruled out making any provision for compensation in the Constitution amendment Bill; it may be provided for in the GST law.

The compensation will be given to states on the lines of a formula to be suggested by the 14th Finance Commission, which is likely to give its report later this month. The panel was asked to give its recommendations on GST's impact on finances of the Centre and states, besides a mechanism for compensation.

"In our view, there will not be any loss. But, to address states' concerns, we can compensate them for the first three years. We have conveyed this to the 14th Finance Commission," a finance ministry official, who did not wish to be named.