The Cabinet on Wednesday approved amendments to the GST (Goods and Services Tax) Bill to compensate states for revenue loss for five years on introduction of the uniform nationwide indirect tax regime, as has been suggested by the Rajya Sabha Select Committee.

The Union Cabinet, chaired by Prime Minister Narendra Modi, on Wednesday evening agreed to the recommendation made by the Select Committee on compensation to states to win over support of regional parties like TMC of West Bengal and BJD of Odisha in getting the landmark constitution amendment approved by the upper house, where the ruling NDA does not have a majority.

The Cabinet decided that the modalities for levy of 1 per cent tax over and above the GST rate by states as well as the 'band' rate would be finalised while framing the rules, sources said.

The Rajya Sabha Select Panel, headed by BJP's Bhupender Yadav, in its report last week suggested GST rate to be no more than 20 per cent and levy of 1 per cent additional tax by states only on actual sales and not on inter-company stock or inventory transfer.

The Constitution Amendment Bill for GST, to replace all indirect taxes like excise and sales tax on all products except alcohol, has already been passed by the Lok Sabha and is pending passage in the upper house.

The amendment approved by the Cabinet on compensation seeks to give an assurance to states for making up for revenue loss they may suffer in first five years of introduction of GST.

Government plans to roll out GST from April 1, 2016, a very tight schedule considering the fact that the Bill has to be approved by Rajya Sabha and half of the 30 states.

The Rajya Sabha panel had recommended an explanation to be included in the provision that would make it clear that the 1 per cent levy would be on goods sold and not on inter-company inventory transfers.

To increase the resources of states, the committee suggested that the "band" rate should be defined in the GST laws. The proposal would provide option to states to levy additional taxes within the band on specified goods and services to raise additional resources to meet local needs.

The final GST rates would be decided by the GST Council, chaired by Finance Minister, with Centre having one-third votes and states together having two-third votes.

The committee had suggested that the provision in the Bill, which provided the Centre "may" compensate states for a period up to five years for any revenue loss, be substituted by a commitment for this compensation for five years.

As per the current mechanism, the Centre will give 100 per cent compensation for first three years of implementation of GST and 75 per cent and 50 per cent in the fourth and the fifth year.

Being touted as the biggest reform in indirect taxation since independence, the GST will ensure a single tax structure for goods and service throughout the country and make India a common market.

The new indirect tax regime will subsume excise, service tax and other local levies.

The ruling BJP government does not have a majority in the Rajya Sabha and will have to depend upon support of regional parties and allies for passage of the Bill.