The comptroller and auditor general of India recently came up with the audit report and stated that that centre has violated the GST law and used the GST funds elsewhere. It stated that the centre has violated the law on the unified tax regime and retained Rs 47,272 crore from the GST compensation cess that was meant to be used for loss of revenue during 2017-18 and 2018-19. Audit examination of information in Statements 8, 9 and 13, which deal with the collection of cess and its transfer clearly shows that there was short crediting in the funds.
The report stated that according to the GST Cess Act, 2017, the collected fund is the part of Public Account for payment to the state in case of loss of revenue, the centre has allegedly used the funds wrongly and thus acted against the prescribed law.
This short crediting has led to the overstatement of revenue receipts and understatement of fiscal years 2017-18 and 2018-19. The report also stated that there was an accounting error in the procedure to transfer the funds to Public Account, where the funds were transferred under the major head of “ transfer of Grants in aid to states”. This has implications on the reporting of Grants in aid as the cess funds are for the states and not for Grants in aid.
The CAG further stated that during 2018-19, there was a budget provision of Rs 90,000 crore which was released for state’s compensation, however, the Department of Revenue transferred only Rs 54,275 crore to the fund. The auditor added 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 the subsequent year”.
This issue of compensation cess has driven conflict between centre and states as the GST council which is the highest decision making body of GST that had submitted 17 different central and state taxes such as excise duty and VAT.
The states have not been paid their promised compensation, the centre stated that due to the slowdown in the economy in the lieu of pandemic enough money has not been collected by way of cess that is levied on luxury goods and services. The centre further asked the states to borrow money for meeting their revenue shortfall.
But the states that are ruled by Congress, TMC and AAP have opposed this move and argued that centre should borrow and provide to states since states have given the majority of their powers to the Centre under GST Act which was introduced in July 2017.
CAG also stated that out of Rs 62,612 crore GST compensation cess collected in 2017-18, Rs 56, 146 was transferred to the non-lapsable fund.
The Finance Minister Nirmila Sitharaman stated in parliament that states cannot be compensated from the Consolidated Fund of India in case of any revenue shortfall, the statement was based on the opinion of the Attorney General of India. This was however contrary to the findings of the CAG report.
According to CAG, the Finance Ministry accepted the audit observation and stated in February 2020 that the cess which is collected and not transferred would be transferred in the subsequent year. Further, any transfer in the subsequent year would require Parliamentary authorisation and the CAG asked the Finance Ministry to take immediate corrective action.
The report also stated that as per the accounting procedure, GST Compensation Cess has to be transferred to Public Account by Major Head ‘2047- other fiscal services’, but the ministry operated it to the Major Head “3601- Transfer of Grants in aid to States”, thereby violating the law and this wrongful operation impacted the report to a large extent.