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Published on: Oct. 10, 2020, 12:20 p.m.
The national auditor’s damaging report on GST
  • Sitharaman: collected but not transferred

By Rakesh Joshi. Executive Editor, Business India

Finance minister Nirmala Sitharaman has been invoking the opinion of the Attorney General of India to claim in Parliament that there was no provision in the law to compensate states for loss of GST revenue out of the Consolidated Fund of India. While 21 BJP-ruled states and those ruled by its allies have fallen in line with the Central government’s line on a borrowing plan, the Opposition-run states are still holding out.

The 10 Opposition-ruled states have still not opted for the borrowing options. Kerala, Punjab and Chhattisgarh recently stated that the federal structure and the consensual nature of the GST Council is getting eroded with the majority view of the ruling party at the Centre being adopted as the choice for all.

Now, fresh ammunition has been provided to the Opposition by the Comptroller and Auditor General (CAG) of India, whose report has found that the government itself violated the law by retaining R47,272 crore of GST compensation cess in the CFI (Consolidated Fund of India) 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’. As such, there was short crediting to the fund of the GST Compensation Cess collections totalling to Rs47,272 crore during 2017-18 and 2018-19.

“The short-crediting was a violation of the GST Compensation Cess Act, 2017,” says the national auditor in a report on the accounts of the Union government, tabled in Parliament on the last day of the Monsoon session. According to 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.

‘Misuse’ of cess 

Not just that, CAG also noted: “Short crediting of cess collected during the year led to overstatement of revenue receipts and understatement of fiscal deficit for the year.” Elaborating, the report says that, during 2018-19, there was a budget provision of R90,000 crore for transfer to the fund and an equal amount was budgeted for release to states as compensation.

However, though Rs95,081 crore was collected during the year as GST compensation cess, Department of Revenue transferred only Rs54,275 crore to the fund. From the fund it paid out Rs69,275 crore (inclusive of an opening balance of Rs15,000 crore in the fund) as compensation to the States/UT. This resulted in savings of Rs35,725 crore on account of short transfer to the fund and of Rs20,725 crore on account of payment of compensation to the states/UTs as against BEs of Rs90,000 crore each for transfer and payment of compensation.

  • 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

On 18 September, replying to the debate on the first batch of Supplementary Demands for Grants for the current financial year in Lok Sabha, Sitharaman said: “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…” Opposition parties are now expected to pillory the Central government on the ‘misuse’ of the cess that was collected. The accumulated cess could now have come in handy to pay compensation to the states. 

According to the CAG report, the Ministry of Finance, while accepting the audit observation, has stated: “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 authorisation.” However, the violation of accounting procedure in respect of the GST compensation cess does not put the Modi government in a very flattering light.

According to 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.

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. 

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