Taking the side of States, the 14th Finance Commission has recommended the creation of an autonomous and independent GST Compensation Fund by the Centre through legislative action.

States have been demanding that the Goods and Services Tax (GST) compensation fund must be created constitutionally.

However, the Centre is of the view that compensation (for any GST revenue loss) would be a temporary feature and, therefore, there was no need for a fund through a constitutional provision.

The compensation fund must be created in a manner that gives reasonable comfort to States, while limiting the period of operations appropriately, the Commission said in a report tabled in Parliament on Tuesday.

Terms of reference The YV Reddy headed 14th Finance Commission has pitched for five years’ compensation to States for any revenue loss incurred by them due to the introduction of GST, given the scale of the reform and the apprehension of revenue uncertainty raised by the States.

The panel suggested that 100 per cent compensation be paid to States in the first, second and third years, 75 per cent compensation in the fourth year and 50 per cent in the fifth and final year.

The terms of reference of the panel required it to consider the impact of the proposed GST on the finances of the Centre and States and the mechanism for compensation, in case of any revenue loss.

However, the panel has — in the absence of clarity on the design of GST and the final rate structure — expressed its inability to estimate revenue implications and quantify the amount of compensation in case of revenue loss to States.

There are several challenges and many unresolved issues, the Commission report said.

The Narendra Modi-led government is yet to accept the recommendations of the 14th Finance Commission as regards GST.

Indications are that these will be examined in due course in consultation with various stakeholders.

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