Union govt cheated states of GST funds? CAG says funds used elsewhere

As per the CAG’s audit, the Union government collected Rs 95,081 crore as GST compensation cess in 2018-19, but only transferred Rs 54,275 crore to the GST compensation fund.
PM Narendra Modi and FM Nirmala Sitharaman
PM Narendra Modi and FM Nirmala Sitharaman

The Union government violated the GST Compensation Cess Act, 2017, by wrongly retaining Rs 47,272 crore in the Consolidated Fund of India (CFI) during 2017-18 and 2018-19. It was supposed to credit it to the GST Compensation fund – which is then supposed to be distributed to state governments. However, the Union government retained the money with itself, the Comptroller and Auditor General (CAG) of India has found. As per the report, this amount was made available for other purposes.

This was revealed in the CAG’s audit report on the accounts of the Union Government for 2018-19. Ironically, this comes just a week after Finance Minister Nirmala Sitharaman claimed in the Parliament that there was no provision in the law to compensate states for loss of GST revenue out of the Consolidated Fund of India.

The CAG noted that crediting less than it should have to the GST cess collection fund was a violation of the GST Compensation Cess Act, 2017.

“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,” the CAG report noted, recommending that the Finance Ministry take corrective action immediately.

As per the CAG’s audit, the Centre collected Rs 95,081 crore as GST compensation cess in 2018-19, but only transferred Rs 54,275 crore to the GST compensation fund. This fund already had Rs 15,000 crore in it.

After this, Rs 69,275 crore was paid out as GST compensation to states and Union Territories.

As per the CAG report, the Union government “saved” Rs 35,725 crore by not transferring the amount it was to transfer to the fund. It adds that the government “saved” a further Rs 20,725 crore because the states got only Rs 69,275 crore out of the total they are supposed to get, which is Rs 90,000 crore.

Several states have been fighting with the Union government over the shortfall in the GST compensation, as opposed to what was promised when the regime was brought in. Citing a financial crunch, the Union government gave states the option to borrow the shortfall, which was met with opposition from several non-BJP ruled states.

The CAG further added that the Finance Ministry accepted the audit observation and said that the proceeds of cess collected and not transferred to Public Account would be transferred in the subsequent year.

According to the approved accounting procedure, the GST Compensation cess should be transferred to the Public Account under the head ‘2047-Other fiscal services’. Instead, the Ministry of Finance moved the funds to ‘3601-Transfer of Grants in aid to States’.

Grants-in-aid are payments made by the Union government to states in the form of assistance, donations, or contributions.

Moving it to grants-in-aid, the CAG noted, has implications on the reporting of grants in aid because the GST Compensation Cess is the right of the states, and is not a grant-in-aid.

With respect to other cesses and levies, the CAG’s audit observed that out of the Rs 2,74,592 crore that the union government 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.

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.

Reserve Funds are funds designated for specific use by the central government.

With the government not transferring these amounts to Reserve Funds, the CAG says, the revenue and fiscal deficit was understated and the failure of the Finance Ministry to operate the essential Reserve Funds “makes it difficult to ensure that the cesses etc., had been utilised for the specific purposes intended by the Parliament.

Watch to know what GST compensation is and why it is important to states

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