States will receive provisional compensation from Centre for loss of revenue from implementation of GST every quarter but the final annual number would be decided after an audit carried out by CAG.
The compensation would be met through levy of a cess called ‘GST Compensation Cess’ on luxury items and sin goods like tobacco, for the first five years.
Any excess amount after the end of five year tenure in the ‘GST Compensation Fund’ so created, would be divided between Centre and states, said the draft GST compensation law made public by the Centre on Saturday.
Half of the excess amount would go to the Consolidated fund of India and would form part of the overall tax kitty, which as per statute, is divided in a fixed proportion between the Centre and states. The remaining 50 per cent would be disbursed among the states in the ratio of their total revenues from SGST in the last year of the transition period.
Any compensation paid to a state found to be in excess of the amount actually due to them after the Comptroller and Auditor General (CAG) audit would be adjusted against next year’s compensation, the draft law said.
The loss of revenue to a state will be the difference between the actual realisation to a state under Goods and Services Tax (GST) regime and the tax revenue it would have got under the old indirect tax regime after considering a 14 per cent increase over the base year of 2015-16.
The draft law would be taken up for consideration by the GST Council headed by Finance Minister Arun Jaitley and comprising all state representatives at the next meeting on December 2-3.
The Council, at its earlier meetings, decided on a 4-tier GST tax structure of 5, 12, 18 and 28 per cent. Luxury items and demerit goods would be taxed at the highest rate and would also attract a cess to create a Rs 50,000 crore corpus for compensating states for loss of revenue.
GST law to have anti-profiteering clause, rate capped at 28%
In order to prevent any rise in price of commodities after GST implementation, the Centre has proposed an 'anti-profiteering' measure to ensure that trade and industry pass the benefits of reduction in tax rates to consumers.
The draft model GST law, which is to be finalised by the GST Council on December 2-3, has also specified that the highest tax slab will not exceed 28 per cent in the GST regime, thus accepting the key demand of Congress.
As per the draft, the central government will constitute an authority or entrust the task to an existing authority to examine that the input tax credits or reduction in tax rates are passed by registered tax payers to consumers.
The Centre on Saturday released 3 drafts –model GST law, IGST law and Compensation law –which have to approved by the Centre and state legislatures for roll out of GST.
Under the new Goods and Services Tax (GST) regime, which is likely to kick in from April 1, all traders and
industries have to be registered with the GST Network to pay taxes, file return and claim refunds.
"Enabling provisions have been made for introduction of anti-profiteering measure, wherein a mechanism may be established to monitor whether the benefit arising to industry on account of GST is passed on to the consumers," said Pratik Jain, Partner and leader Indirect Tax at PwC.
The draft Integrated GST (IGST) law which has to be adopted by Centre as well as the states, says that Centre will notify the GST rate on the recommendations of the GST Council but it would not exceed 28 per cent.