Centre used GST Compensation Cess funds of Rs 47,272 Cr allocated for states elsewhere – CAG report
The Comptroller and Auditor General (CAG) of India has found that the Centre violated its own law on the Goods and Services Tax regime and retained Rs 47,272 crore of the GST compensation cess that meant to be used specifically to compensate states for loss of revenue, during the financial year of 2017-18 and 2018-19.
The CAG also known as the Supreme Audit Institution of India, mandated by the Constitution of India, strives to promote accountability, transparency and good governance through high quality auditing and accounting and provide independent assurance to their stakeholders, the Legislature, the Executive and the Public, that public funds are being used efficiently and for the intended purposes.
CAG conducted audit on the Accounts of the Union Government for FY 2018-19. The audit report gave an overview on Union Government Finances for the year 2018-19 and consisted of observations of the CAG.
What do you mean by GST Compensation Cess?
- The GST Compensation Cess Act, 2017 provides for levy of a cess for the purpose of providing compensation to the States for loss of revenue arising due to implementation of GST for a period specified in the Act.
- As per the Act and the accounting procedure, the entire cess collected during the year is required to be credited to a non-lapsable Fund (the GST Compensation Cess Fund) which shall form part of the Public Account and shall be used for the purpose mentioned i.e., for providing compensation to the States for loss of revenue.
Audit Observation on GST Compensation Cess
Audit examination with regard to collection of the cess and its transfer to the GST Compensation Cess Fund, showed 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 short-crediting was a violation of the GST Compensation Cess Act, 2017. Details are given in the Table below:
|Year||Total Collected||Total Transferred to Fund||Short Transfer|
|2017-18||62,612 crores||56,146 crores||6,466 crores|
|2018-19||95,081 crores||54,275 crores||40,806 crores|
- The amount by which the cess was short credited was also retained in the Consolidated Fund of India (CFI) and became available for use for purposes other than what was provided in the Act.
- Ministry accepted the audit observation and stated that the proceeds of cess collected and not transferred to Public Account would be transferred in subsequent year.
- Short crediting of cess collected during the year led to overstatement of revenue receipts and understatement of fiscal deficit for the year.
- Also, 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’.
- Instead, Ministry of Finance operated the Major Head ‘3601-Transfer of Grants in aid to States’.
- The wrongful operation had implications on the reporting of Grants in aid, since the GST Compensation Cess was the right of the States and was not a Grant in aid. It was recommended that Ministry of Finance take immediate corrective action.
- 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.
Issues relating to Integrated Goods and Service Tax (IGST) reporter in the earlier years
- In CAG’s Report No.2 of 2019 on Accounts of the Union Government for the year 2017-18, it was reported that devolution to States/UTs of IGST amounting to Rs 67,998 crore, was not consistent with the scheme of GST/IGST.
- Instead, IGST was to be apportioned as per the procedure prescribed in the IGST Act.
- The findings were elaborated in CAG’s Report No.11 of 2019- Indirect Taxes- Goods and Services Tax.
- Government of India was advised to account for its IGST share correctly, apportion 50% to the States as per the IGST Act, and thereafter also devolve to States their share under Article 270.
Issues relating to accounting of IGST reporter in the current Audit Report
- Audit examination of 2018-19, disclosed that during 2018-19 an amount of Rs 15,001 crore was delegated to States/ UTs as share of net proceeds of IGST.
- This amount was accounted under minor head 901- ‘Share of Net Proceeds Assigned to States’ under Major Head 0008-IGST, even though scheme of GST/IGST did not provide for assignment of share of net proceeds of IGST to States and only provides for its apportionment between the Centre and States/UTs.
- Also, a sum of Rs 13,944 crore was unapportioned under Major Head 0008 and retained in the CFI though the amended IGST Act now, provided for a process for ad-hoc apportionment of IGST.
- No reasons were provided by Department of Revenue for non-apportionment of this balance amount
- As a result of the continued adoption of the erroneous process of devolution of IGST to states and retention of unapportioned balance in the CFI instead of first apportioning IGST between the Centre and States/UTs and then devolving States’ share from the amount apportioned to the Centre, States had overall received less funds on account of IGST.
- This also implied that tax receipts of the GoI were overstated to that extent and the revenue deficit understated during the year.
- It was recommended that the devolution/apportionment of IGST and its accounting, be reviewed and aligned with the extant Constitutional and Statutory provisions.
Collection of cesses Discontinued/ Abolished in GST
Several cesses were subsumed under the Goods and Services tax (GST) w.e.f. July 2017. Audit noticed that the collections against these abolished cesses had continued during 2018-19 and a total amount of Rs 414.51 crore was collected on account of these abolished cesses and deposited in the Consolidated Fund of India as per details given in Table below:
|Name of Cess||Amount in crores|
|Krishi Kalyan Cess||168.89|
|Clean Energy Cess||4.88|
|Cess on Jute||0.16|
|Cess on Tobacco||0.07|
|Cess on Rubber||4.27|
|Cess on Sugar||13.40|
|Cess on Automobiles||0.08|
|Swachh Bharat Cess||216.40|
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 were transferred to Reserve Funds/ Boards during the year and the rest was retained in the CFI. This included collections amounting to Rs 382 crore on account of 17 cesses abolished/subsumed in GST with effect from 1 July 2017, which were retained in the CFI.
The CAG findings run contrary to Finance Minister Nirmala Sitharaman’s submissions in Parliament last week that states could not be compensated for revenue shortfall from the Consolidated Fund of India (CFI) relying on an opinion from the Attorney General of India which stated that there was no such provision in law.
The states are staring at a Rs 2.35 lakh crore GST revenue shortfall this fiscal. Of this, as per the Centre’s calculation, Rs 97,000 crore is estimated to be on account of GST implementation, while the remaining Rs 1.38 lakh crore is due to the coronavirus pandemic. The Centre last month provided two options to states to borrow either Rs 97,000 crore from a special window facilitated by the RBI, or Rs 2.35 lakh crore from the market and also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.
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