Extra tax of 1 percent to compensate states post-GST roll-out

Reiterating his assurance to states that they would not lose "even a rupee of revenue" due to the proposed Goods and Services Tax (GST) regime, Finance Minister Arun Jaitley Monday said the Centre proposed to levy a non-vatable additional tax on goods involved in inter-state trade, to be assigned to states.

According to a finance ministry statement here, Jaitley told the parliamentary consultative committee that "it is proposed to levy a non-vatable additional tax of not more than 1 percent on supply of goods in the course of inter-state trade or commerce".

While this tax on supply of goods will be levied for 2 years, a period that is extendable if recommended by the GST Council, "this additional tax shall be assigned to the states from where such supplies originate," the statement added.

The Centre will compensate states for a period up to five years for any loss of revenue arising from implementing the GST.

"The finance minister said a provision in this regard has been made in the Constitution Amendment Bill," the ministry said.

He said that the compensation will be on a tapering basis, that is, full compensation for first three years, 75 percent in the fourth, and 50 percent in the fifth year.

The government Friday tabled the Goods and Services Tax (GST) Bill in the Lok Sabha, thus initiating the legislation for the much awaited reform of India's indirect tax system.

Calling it the single most important tax reform since 1947, Jaitley told the house that the states will receive Rs.11,000 crore this fiscal towards partial compensation of the losses suffered by them for reduction in the Central Sales Tax (CST).

He had earlier told parliament that the central government would clear states' compensation dues of about Rs.34,000 crore ($5.5 billion) over a three-year period.

While the CST is levied by the Centre on inter-state movement of goods and collected by states, the issue of compensation arose because the central government cut the CST from 4 percent to 2 percent in phases after state-level VAT was introduced from April 1, 2005.

Seen as a key to facilitating industrial growth and improving the business climate in the country, the GST bill needs to be passed by a two-thirds majority in both houses of parliament and by the legislatures of half of the 29 states to become law.

By subsuming most indirect taxes levied by the central and state governments such as excise duty, service tax, VAT and sales tax, GST proposes to facilitate a common market across the country, leading to economies of scale and reducing inflation through an efficient supply chain.