CAG report accuses GoI of violation of GST compensation law

By: Trinanjan Chakraborty

In the background of the debate and dispute between the center and several state governments over the GST due payment to the latter, a report on the accounts of the central government for 2018-’19, tabled in both Houses of Parliament on Wednesday by the Comptroller & Auditor General (CAG) of India has said that the union government was itself in violation of 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 honorable Finance Minister had told Parliament last week that law forbids compensating of states for loss of GST from the CFI. However, now the CAG report reveals that the central government itself is in violation of the GST Compensation Cess Act, 2017. As per the provisions of the GST Compensation Cess Act, the entire cess collected during a year is required to be credited to a non-lapsable fund (GST compensation cess fund) which is part of the Public Account, and is meant to be used specifically to compensate states for loss of revenue. The 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 relief for states for the loss of revenues arising from the implementation of GST. If a state’s revenue grows slower than 14%, it is supposed to be compensated by the Centre using the funds specifically collected as compensation cess. To provide these grants, the Centre levies a GST compensation cess on certain luxury goods.

However, the CAG Audit found that instead of transferring the entire GST amount to GST Compensation Fund, the Center retained a portion in the CFI and used it for other purposes. The report states that during 2018-19, there was provision of Rs 90, 000 crore for transfer to the GST Compensation Fund and an equal amount was budgeted for release to the states. However, though actual collection was Rs 95,081 crore as GST Compensation Cess, only Rs 54, 275 crore out of this collection was transferred to the states. The CAG report further states that the Ministry of Finance has accepted the observations in the report and has stated that it will transfer the proceeds of “Cess collected and not transferred to Public Account” in subsequent year.

The CAG report also called out violation of accounting procedure in the GST compensation cess. As per the approved accounting procedure, GST compensation cess needs to be transferred to the Public Account by debit to ‘Major Head 2047-Other fiscal services.’ But in practice, it was done to Major Head ‘3601-Transfer of Grants in aid to States.’ According to the CAG audit, this is ”wrongful” since GST compensation cess is a right for the states and not a ‘grant in aid.’ The report recommends the Finance Ministry to correct this violation with immediate effect.

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