Source: Economic Times

The 14th Finance Commission, headed by former RBI governor Y V Reddy, has endorsed the compensation road map for the goods and services tax finalised by the Centre, but has called for an autonomous and independent GST compensation fund. The commission felt this will give greater comfort to states when GST replaces all indirect taxes levied on goods and services.

“We recommend the creation of an autonomous and independent GST Compensation Fund through legislative actions in a manner that it gives reasonable comfort to states, while limiting the period of operation appropriately,” the commission said it is report tabled in Parliament on Tuesday.

In the case of value-added tax, compensation was provided to the states for three years, at 100% in the first year, 75% in the second year, and 50% in the third year, and the commission has suggested a similar pattern for GST compensation, but for five years.

“In our view, it should be for five years. It is suggested that 100% compensation be paid to the states in the first, second and third years, 75% compensation in the fourth year and 50% compensation in the fifth and final year,” it said.

The Finance Commission acknowledged that the Centre may have to initially bear an additional fiscal burden arising due to the GST compensation, but this should be treated as an investment that is certain to yield substantial gains to the nation in the medium and long run.

“We also believe that GST compensation can be accommodated in the overall fiscal space available with the Union government,” it said. The government had introduced the constitution amendment bill on GST in Lok Sabha in the previous session. It is hoping to introduce the new tax from April, 2016.

The GST aims to create seamless national market for goods and services by removing distortions caused by state fiscal policies and entry taxes that create geographical boundaries. It will replace excise duty and service tax at the central level and state taxes including value-added tax, entry tax, octroi, electricity duty, purchase tax.