GST Compensation revives bitter memory of Centre-state tussle over VAT

Under the VAT system, the compensation mechanism linked to the cut in central sales tax from 4% to zero had created bad blood between the union govt and the states

Bitten by their experience over compensation under the VAT regime, states were not keen to join the then proposed goods and services tax (GST) system in a hurry unless there was a guarantee to compensate them.

Under the VAT system, the compensation for revenue loss to states was to be 100 per cent in the first year of the implementation of the levy, 75 per cent in the second year and 50 per cent in the third year. 

However, there was another compensation mechanism linked to the cut in central sales tax (CST) from four per cent to zero, which