Citing the opinion of the Attorney General of India, Finance Minister Nirmala Sitharaman told Parliament last week that there was no provision in the law to compensate states for loss of GST revenue out of the Consolidated Fund of India (CFI).
However, the Comptroller and Auditor General (CAG) of India has found that the government itself violated the law by retaining Rs 47,272 crore of GST compensation cess in the CFI during 2017-18 and 2018-19, and used the money for other purposes, which “led to overstatement of revenue receipts and understatement of fiscal deficit for the year”.
“Audit examination of information in Statements 8, 9 and 13 with regard to collection of the cess and its transfer to the GST
Compensation Cess Fund, shows that there was short crediting to the Fund of the GST Compensation Cess collections totalling to Rs 47,272 crore during 2017-18 and 2018-19,” the CAG has said.
“The short-crediting was a violation of the GST Compensation Cess Act, 2017,” the national auditor said in its report on the accounts of the Union government, which were tabled in Parliament on Wednesday, the last day of the Monsoon session.
As per the provisions of the GST Compensation Cess Act, the entire cess collected during a year is required to be credited to a non-lapsable fund (GST compensation cess fund) which is part of the Public Account, and is meant to be used specifically to compensate states for loss of revenue.
However, the government, instead of transferring the entire GST cess amount to the GST compensation fund, retained it in the CFI, and used it for other purposes.
“The amount by which the cess was short credited was also retained in the CFI and became available for use for purposes other than what was provided in the act,” CAG said. “Short crediting of cess collected during the year led to overstatement of revenue receipts and understatement of fiscal deficit for the year,” it said.
Elaborating, the report says: “During 2018-19, there was budget provision of Rs 90,000 crore for transfer to the Fund and an equal amount was budgeted for release to States as compensation. However, though Rs 95,081 crore was collected during the year as GST compensation cess, Department of Revenue transferred only Rs 54,275 crore to the Fund.
“From the Fund it paid out Rs 69,275 crore (inclusive of an opening balance of Rs 15,000 crore in the Fund) as compensation to the States/ UT. This resulted in savings of Rs 35,725 crore on account of short transfer to the Fund and of Rs 20,725 crore on account of payment of compensation to the States/ UTs as against BEs of Rs 90,000 crore each for transfer and payment of compensation,” the CAG said.
On September 18, replying to the debate on the first batch of Supplementary Demands for Grants for the current financial year in Lok Sabha, Sitharaman said, “Cess ke dwara jitna compensation collect hota hai, woh hota hai compensation jise state ko dena hota hai… agar cess collection mein kuchh nahin hai, to nahin hai.” (The compensation that is collected through the cess is the compensation that has to be given to the state… If no cess is collected, there is nothing.)… The A-G has given his opinion that there is no provision in the GST law to give (compensation) from the Consolidated Fund…”
According to the CAG report, the Ministry of Finance has accepted the audit observation, and has stated that “the proceeds of cess collected and not transferred to Public Account would be transferred in subsequent year”.
“Further, any transfer in the subsequent year would become an appropriation from the resources of that year and would require Parliamentary authorization,” the report says.
The CAG has also highlighted the violation of accounting procedure in respect of the GST compensation cess.
As per the approved accounting procedure, GST compensation cess was to be transferred to the Public Account by debit to Major Head ‘2047-Other fiscal services’, the report says. “Instead, Ministry of Finance operated the Major Head ‘3601-Transfer of Grants in aid to States’. The wrongful operation has implications on the reporting of Grants in aid, since the GST Compensation Cess is the right of the States and is not a Grant in aid.
“It is recommended that Ministry of Finance take immediate corrective action,” the report says.
Apart from the GST compensation cess, the CAG has also mentioned instances of non-transfer of entire amounts of other cesses to their respective Reserve Funds, including the Road and Infrastructure Cess, Cess on Crude Oil, Universal Service Levy, and National Mineral Trust Levy.
“Audit observed, however, that out of the Rs 2,74,592 crore received from 35 cesses, levies and other charges in 2018-19, only Rs 1,64,322 crore had been transferred to Reserve Funds/ Boards during the year and the rest was retained in the CFI,” the CAG said.
“Consequently, not only was the revenue/ fiscal deficit understated due to the non-transfer of these amounts to Reserve Funds, failure of the Ministry of Finance to create/ operate essential Reserve Funds makes it difficult to ensure that the cesses etc., had been utilised for the specific purposes intended by the Parliament,” it added.
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