A constitutional assurance of compensation is one of the key features that differentiates the Constitution Amendment Bill for the Goods & Services Tax of the NDA Government from the one proposed by the erstwhile UPA Government.

Now, to make the Bill more acceptable to the States, the NDA Government is believed to be ready to incorporate a recommendation by the Parliamentary panel about full 100 per cent compensation for five years and then on a tapering basis. This is to give comfort to the States fearing a revenue loss after the implementation of GST. The Centre intends to implement the levy from April 1 next year.

Bone of contention

The compensation issue had been a bone of contention between the Centre and States for obvious reasons. Earlier, when it was announced that GST would be introduced from April 1, 2010, it was also envisaged that the Central Sales Tax (CST) would be phased out and that States would be compensated for the same.

Accordingly, CST was lowered to 2 per cent from 4 per cent. Initially compensation was given but it was stopped later due to certain issues.

With this in mind, the States were adamant on a Constitutional assurance for compensation, but this failed to get a consensus under the previous regime.

However, within months of assuming charge, the Modi Government changed its stance and that paved the way for introduction of the Constitution Amendment Bill in the Lok Sabha last December.

Originally the Bill prescribed that in case of any revenue loss after the introduction of the GST, the States would get full compensation for first three years, 75 per cent in the fourth year and 50 per cent in the fifth year. However, the Empowered Committee of States’ Finance Minister insisted on full compensation for five years and this was supported by the Select Panel of the Rajya Sabha.

Bridging trust deficit

Disposing before the Select Panel, the Revenue Department said that to bridge the trust deficit with the States and to ensure no revenue loss to them, it has been Constitutionally provided that the States shall be compensated for five years for their losses due to introduction of GST. The panel recommended that “Parliament may, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for the loss of revenue arising on account of implementation of the Goods and Services Tax for a period of five years.”

A senior Finance Ministry official said: “We don’t think that losses will continue after two years (from the date of implementation of GST). So, accepting full 100 per cent compensation for five years should not create any problem.”

However, this will be verifiable only when the GST is implemented; currently there are big doubts over its implementation from April 1.