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 5 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 CAG audit would be adjusted against next year’s compensation.