A CAG report had pointed out that there was short crediting of the GST cess collected by the central government totalling ₹47,272 crore tantamount diversion of the funds. The government’s statutory auditor had said in the financial audit report for FY19 tabled in Parliament that there was short crediting of the GST compensation cess collection, totalling ₹47,272 crore, during FY18 and FY19 to the GST Compensation Cess Fund, which is part of the public account. Unlike the Consolidated Fund of India (CFI), withdrawals from the public account does not need Parliament’s approval and the funds do not belong to the central government. The audit report pointed out this short crediting was a violation of the GST Compensation Cess Act of 2017. It also said the fund retained in CFI became available for use for purposes other than what was provided for in the Act, a view the finance ministry does not concur with. The CAG report also pointed out that the short crediting of cess collected led to overstatement of revenue receipts of the government and understatement of fiscal deficit.
Actual GST compensation to states
According to available information, in 2017-18, Rs 62,611 crore was collected by way of GST cess, out of which the government released full compensation dues of Rs 41,146 crore to the states and union territories (UTs). In 2018-19, an amount of Rs 95,081 crore was collected, out of which Rs 69,275 crore was paid as full compensation dues to states and UTs.
Thus, an amount of Rs 47,271 crore collected in the 2017-18 and 2018-19 had remained unutilised for reconciliation post full payment of GST compensation dues. For the year 2019-20, the central government released Rs 1,65,302 crore as GST compensation against a cess collection of Rs 95,444 crore which it could do so with the unutilised cess of Rs 47,271 crore.
The GST (Compensation to States) Act
The GST (Compensation to States) Act guarantees all states an annual growth rate of 14 per cent in their GST revenue in the first five years of implementation of GST beginning July 2017. It was introduced as a relief for states for the loss of revenues arising from the implementation of GST. If a state’s revenue grows slower than 14 per cent, it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess. To provide these grants, a GST compensation cess is levied on certain luxury and sin goods.
The collected compensation cess flows into the consolidated fund of India (CFI), and is then transferred to the Public Account of India, where a GST compensation cess account has been created. States are compensated bi-monthly from the accumulated funds in this account.
However, instead of transferring the entire GST cess amount to the GST compensation fund during 2017-18 and 2018-19, the CAG found that the Centre retained these funds in the CFI and used it for other purposes.
The Central Government’s view
Days after the Comptroller and Auditor General (CAG) flagged that the Centre in first two years of the GST implementation wrongly retained GST compensation cess that was meant to be used specifically to compensate states for loss of revenue, ministry sources said compensation due for the year 2017-18 and 2018-19 was fully paid to states. The Central government held that the time taken in reconciliation of compensation receipts can’t be termed as diversion of GST cess fund when the dues to states were fully released by the central government. The central government retained the amount unutilized after making full compensation payment to states for the years. Also, in FY20, the Centre released ₹1.65 trillion as GST compensation to states although only ₹95,444 crore was collected as the cess in that year. The government contends that this was done with the previously unutilized cess collection and therefore cannot be called a diversion.
Clarification by the Finance Ministry
The ministry clarified that all amounts including taxes and cesses that are collected by the Centre get credited first to the CFI and only after that it is transferred to the any other fund through a budget head in the Union budget. “The government makes all efforts to transfer all amounts collected by the end of every financial year into the Fund by making necessary budget provisions. The Finance Ministry acknowledged that the GST Compensation Act requires that the cess collected in the CFI should be transferred to the Compensation Fund and compensation to states should be released from that. An official of the ministry explained thus: “Since the final accounts of amounts collected are known only after the end of financial year, normally by the end of June next year after necessary reconciliation, any amount collected over and above the estimate, will remain in CFI temporarily. After reconciliation, the amount is transferred to the Compensation Fund and from that to the states as per their compensation formula. Such temporary retention of GST cess in CFI pending reconciliation cannot be treated as diversion by any stretch of imagination.”
All amounts including taxes and cess that are collected by the Centre should, under the Article 266 of the Constitution, get credited first to the CFI and then only it could be transferred to any other fund through a budget head in Union Budget. The government makes all efforts to transfer all amounts collected by the end of every financial year into the fund by making necessary budget provisions. Therefore, government holds that such temporary retention of GST cess in CFI pending reconciliation cannot be treated as diversion by any stretch of imagination.