Union finance minister Nirmala Sitharaman claimed in the parliament that there was no provision in the law to compensate the state for loss of GST revenue out of the CFI Credit: Twitter image

In a recent expose by the Comptroller and Auditor General (CAG) it was found that the Union government has violated the GST Compensation Cess Act, 2107 by wrongfully retaining Rs 47,272 crore in the Consolidated Fund of India (CFI) during the years 2017-18 and 2018-19.

This sum of money was supposed to credit to the GST Compensation Fund and then was supposed to be distributed to the state governments. According to the report by the CAG, this amount was made available for other purposes. This was all revealed in the CAG’s audit report of the Union government for 2018-2019.

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What’s more ironic is the fact that the audit report comes just a week after Union finance minister Nirmala Sitharaman claimed in Parliament that there was no provision in the law to compensate the state for loss of GST revenue out of the CFI. However, 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 CAG report noted, “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 report also recommended that the Finance Ministry should take corrective measures immediately.

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According to the CAG’s audit, the Centre has collected Rs 95,081 crore as GST compensation cess in 2018-2019 but has just transferred Rs 54,275 crore to the GST compensation fund. This fund already had Rs 15,000 crore in it. Also, after this Rs 69,275 crore was paid out as GST compensation to states and Union Territories.

The CAG report highlighted that the Union government “saved” Rs 35,725 crore by not transferring the amount it was supposed to transfer to the fund. Additionally, the government further “saved” Rs 20,725 crore as the states only got Rs 69,275 crore out of the total that they were supposed to get which is Rs 90,000 crore.

Many states have been fighting with the Union government over the shortfall in the GST compensation which is opposed to what was promised when the regime was first brought in. Taking the shade of a “financial crunch,” the Union government gave states the option to borrow the shortfall. This was met with vehement opposition from several non-BJP ruled states.

Additionally, according to the report, the finance ministry accepted the audit observation and even said that the proceeds of cess collected and not transferred to Public Account would be transferred in the subsequent year.

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If one goes by the approved accounting procedure, the GST Compensation cess should be transferred to the Public Account under ‘2047-Other fiscal services.’ However, 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. Hence, moving it to grants-in-aid has implication 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, noted the CAG.

The CAG’s audit, with respect to other cesses and levies- observed that out of the Rs 2,74,592 crore which the Union Government received from the 35 cesses, levies, and other charges in 2018-2019, only Rs 1,64,322 crore was transferred to Reserve Funds/Boards during the year. The rest was retained in the CFI.

This also includes collections that amounted to Rs 382 crore on account of 17 cesses subsumed/abolished in GST with effect from July 1, 2017, which were retained by the CFI.

Reserve Funds are funds designated for specific use by the central government and with the government not transferring these amounts to Reserve Funds, the revenue and fiscal deficit were understated stated the CAG. This also showcases the failure of the Finance Ministry to even operate the essential Reserve Funds which “makes it difficult to ensure that the cesses etc., had been utilised for the specific purposes intended by the Parliament.”

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