The Centre must work out a compensation mechanism to take care of the losses suffered by states on account of GST, Sushil Kumar Modi, chairman of the empowered committee of state finance ministers set up to implement the goods and services tax (GST) in India, said today.
“An independent mechanism should be set up to compensate the losses of the state governments,” Modi said.
The BJP leader, who was attending an interactive session of a chamber here, said if the Centre wanted a smooth rollout of GST, which required two-third majority in Parliament, it should come up with a five-year compensation package for the state governments.
“GDP growth could go up by 2 per cent if GST is implemented. But states would incur losses on account of the revenue forgone,” Modi said.
GST is an indirect tax that seeks to subsume central and state taxes such as excise duty, service tax and value-added tax (VAT).
The central government, in order to align its existing tax structure in favour of GST, had brought down the central sales tax from 4 per cent to 2 per cent. But following the delay in the rollout of GST, the states have asked the Centre to consider restoring the rate back to 4 per cent or compensate for the loss of revenue.
Modi said almost 80 per cent of the state governments have reached a consensus and once the remaining 20 per cent agreed, GST could be rolled out within a few months.
Issues such as compensation and the formation of a revenue neutral rate that will ensure no loss of revenue for the states are some of the key parameters being worked out, Modi said.