The Y.V.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 goods and services tax (GST).

The revenue compensation should be for five years given the scale of the reform and the apprehension of revenue uncertainty raised by the States, the Panel said in its report tabled in Parliament on Tuesday.

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

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

However, this 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 due to introduction of GST.

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

COMPENSATION FUND

Seeing merit in the views of the States, the 14th Finance Commission has recommended the creation of an autonomous and independent 'GST Compensation Fund' by the Centre through legislative action.

This must be done in a manner that gives reasonable comfort to States, while limiting the period of operations appropriately, the commission report said.

States have been demanding that the GST compensation Fund must be created constitutionally.

However, the Centre has been taking a view that compensation would be a temporary feature and therefore there appeared to be no requirement to create the fund through a constitutional provision.

The Modi-led Government is yet to accept the recommendations of the 14th Finance Commission as regards GST. Indications are that these recommendations will be examined in due course in consultation with various stakeholders.

Srivats.kr@thehindu.co.in

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