NEW DELHI: The 14th Finance Commission has suggested that the Centre provide 100% compensation to states for the first three years for their revenue loss after implementation of the goods and services tax (GST) and set up a compensation fund.

The recommendations are expected to embolden the sta- tes to urge the Centre to rework its compensation formula and act as a hurdle in implementation of the country's most ambitious indirect tax reform.

"Given the scale of reform and apprehension of revenue uncertainty raised by the states, the revenue compensation should be for five years," the commission headed by former RBI governor Y V Reddy said. "It's suggested that 100% compensation be given to the states in the first, second and third years, 75% in the fourth year and 50% in the fifth and final years," it said.

The panel said the government should set up the compensation fund as states want such an entity be created constitutionally. "We recommend an autonomous and independent GST Compensation Fund through legislative action in a manner that it gives comfort to states limiting the period of operation appropriately," the panel said.

It said there were challenges and in the absence of clarity on the GST design and the final rate structure it's difficult to quantify compensation in case of revenue loss to states.