GST tussle: States want full compensation for 5 years

Many states, half of which have to be on the side of the proposed constitutional amendment on a national goods and services tax to enable its roll-out from next April, demanded on Thursday its modification to ensure full compensation for five years in the event of a revenue loss due to the switch.

Besides, there were differences between states over the one per cent tax provided  in the Bill to help manufacturing states such as Maharashtra, Gujarat and Tamil Nadu.

Also, some states raised the issue of subsuming the purchase tax into the proposed GST, and a tax on tobacco, K M Mani, head of the Empowered Committee of State Finance Ministers told reporters in New Delhi.

Some also demanded empowering of local bodies to tax some advertisements, taken away by the Bill, sources said.

Despite all this, Mani was hopeful that GST would still be on from April 2016, a point concurred by independent experts. 

He said he’d meet the Rajya Sabha panel examining the proposal on June 16 to present states' demands.

Before that, the EC would try to formulate a view on differences between states on the one per cent tax for manufacturing ones, Mani said.

At present, the Bill provides for the tapering of compensation for revenue loss from the fourth year.

For the first three, states would be given full compensation. This would reduce to 75 per cent in the fourth year and 50 per cent in the fifth year.

“States want full compensation for five years, not in this phased manner,” Mani said.

Before drafting of the Bill by the central government, states had pressed for inclusion of the compensation for five years in the Bill.

The Centre had agreed to this demand but did not agree to full compensation for the fourth and the fifth years.

States also want a change in the wording.

The Bill says ‘compensation may extend to five years’. 

States want a change to ‘compensation shall extend to five  years’, sources  said.

The Bill needs assent  of at least 15 of the 29 states.

The ruling National Democratic Alliance has 11 with it.

However, every state would also have to prepare its own GST Bill in line with the Centre, to enable pan-India roll-out. So, a consensus is key.