New Delhi: The government has decided to compensate states for any revenue loss on account of the implementation of the goods and services tax (GST), a move that will encourage states to go in for the new tax structure scheduled to be implemented from 1 April, next year.
Admitting that some states might lose revenue under the new tax regime, highly placed sources in the finance ministry said, “the losses will be compensated”.
GST, once implemented, will do away with most of the indirect taxes. It will have a dual structure, one rate for the centre and the other for the states.
State finance ministers, at a pre-budget meeting with the finance minister Pranab Mukherjee, had demanded that the Center should compensate states for any loss of revenue following implementation of the GST.
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Although the Centre is mulling a five-year compensation programme, states are of the view that there should not be any time-frame for compensation scheme.
Under the GST structure, the tax would be collected by the states where the goods or services are consumed, and hence losses could be heavy for the producer states and the Centre would be required to compensate them for loss of revenue.
The Centre had earlier came out with a similar scheme to compensate states for loss of revenue following implementation of value added tax, which came into effect from 1 April, 2005.
The compensation structure was 100% in the first year, 75% in the second year and 50% in the third year. However, since VAT revenue showed good growth, the Centre received claims of only Rs13,167 crore till 31 January, 2008.