Draft law for states' compensation to be ready by November 15

Growth rate of 14% would be taken for calculating the likely revenue of each state in first 5 years

The Centre is set to draft the goods and services tax (GST) compensation law by November 15 for discussion in the next meeting of the GST Council, slated for November 24-25. States had demanded such a law to fully compensate them for a period of five years for the likely revenue loss they might incur. The law is likely to be approved in the next Council meeting. 

“The Compensation Bill will include a range of clauses clearly defining each term, leaving no scope for ambiguity. That a separate account will be created for income for cess solely for compensating states will also be a part of the law,” said an official. 

The GST Council is chaired by Finance Minister Arun Jaitley with state finance ministers or their representatives as members. 

The base year for calculating the revenue of a state has been decided to be 2015-16. Besides, a secular growth rate of 14 per cent would be taken for calculating the likely revenue of each state in the first five years of implementation of GST. States getting lower revenue than this would be compensated by the Centre.

A cess on demerit goods at 28 per cent GST rate will also be a part of the proposed Compensation Act. The additional cess will be imposed on luxury cars, pan masala, tobacco and aerated drinks. According to the finalised proposal, the incidence of tax on these items will remain at the current levels even under GST. The Centre is expecting Rs 50,000 crore revenue from cess, including Rs 26,000 crore by way of clean environment cess to compensate states. 

Besides, the National Calamity Contingent Duty (NCCD) currently imposed on central excise will continue under GST. The government collected Rs 4,500 crore by way of NCCD in 2015-16. It eyes Rs 4,900 crore in the current financial year. 

A senior official said the compensation law would include what compensation should be given for what types of taxes – purchase tax, local tax etc. “Besides, it will define ‘revenue to be subsumed’ and ‘revenue to be counted for compensation’,” he added.