Central Govt violated GST Compensation Cess Act by using Funds allocated for States elsewhere, says CAG Report [Read Report]

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The Comptroller and Auditor General of India (CAG) has come down on the utilization of cess collections by the Centre.

The report further questioned the utilization of Integrated Goods and Services Tax (IGST) revenues.

“Centre used this money for other purposes, which led to overstatement of revenue receipts and understatement of fiscal deficit for the year. The short-crediting was a violation of the GST Compensation Cess Act, 2017,” the CAG report found.

The Report stated that the government itself violated the law by retaining Rs 47,272 crore of GST compensation cess in the Consolidated Fund of India (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”.

The revelations were made in a report tabled by the CAG in both Houses of Parliament on September 23. The report surfaced a week after Finance Minister Nirmala Sitharaman told the Parliament that there was no provision in the law to compensate states for the loss of GST revenue out of the Consolidated Fund of India.

The GST Act guarantees all states an annual growth rate of 14% in their GST revenue during the period July 2017-June 2022. It was introduced as a relief for states for the loss of revenues occurring from the implementation of GST.

If a state’s revenue grows slower than 14%, it should be compensated by the Centre using the funds specifically collected as compensation cess.

To give these grants, the Centre levies a GST compensation cess on some specific luxury goods. The collected compensation cess flows into the Consolidated Fund of India, and later transferred to the Public Account of India, where a GST compensation cess account has been created. States are compensated bi-monthly from the funds collected in this account.

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.

The report elaborated that “during 2018-19, there was a 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,” CAG said.

“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,” it added.

CAG said that 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 years”, also highlighting the violation of accounting procedure in the compensation cess.

As per the approved procedure, GST compensation cess needs 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’,” CAG said.

“This 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,” the auditor found.

CAG also recommended that the Ministry of Finance take immediate corrective action.

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