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States will receive provisional compensation from Centre for loss of revenue from implementation of Goods and Service Tax every quarter but the final annual number would be decided after an audit carried out by Comptroller and Auditor General.
The compensation would be met through levy of a cess called 'GST Compensation Cess' on luxury items and sin goods like tobacco, for the first five years.
Any excess amount after the end of five year tenure in the 'GST Compensation Fund' so created, would be divided between Centre and states, said the draft GST compensation law made public by the Centre on Saturday.
Half of the excess amount would go to the Consolidated fund of India and would form part of the overall tax kitty, which as per statute, is divided in a fixed proportion between the Centre and states. The remaining 50 per cent would be disbursed among the states in the ratio of their total revenues from SGST in the last year of the transition period.
Any compensation paid to a state found to be in excess of the amount actually due to them after the CAG audit would be adjusted against next year's compensation, the draft law said.
The loss of revenue to a state will be the difference between the actual realisation to a state under Goods and Services Tax (GST) regime and the tax revenue it would have got under the old indirect tax regime after considering a 14 per cent increase over the base year of 2015-16.
The draft law would be taken up for consideration by the GST Council headed by Finance Minister Arun Jaitley and comprising all state representatives at the next meeting on December 2-3.
The Council, at its earlier meetings, decided on a 4-tier GST tax structure of 5, 12, 18 and 28 per cent. Luxury items and demerit goods would be taxed at the highest rate and would also attract a cess to create a Rs 50,000 crore corpus for compensating states for loss of revenue.
