CAG report: Centre violated GST law, used funds meant for states elsewhere

Last updated on February 17th, 2023 at 11:59 am

The Comptroller and Auditor General (CAG) of India has found that the Central government in the first two years of the GST (Goods and Services Tax) implementation 2017-19 wrongly retained Rs 47,272 crore of the GST compensation cess that was meant to be used explicitly to compensate state governments for loss of revenue.

The CAG tabled its report on the accounts of Modi government for 2018-19 in both Houses of Parliament on Wednesday.

“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”

In its latest audit report, the CAG has stated that the amount was meant to be transferred to the appropriate non-lapsable GST Compensation Cess collection fund which was further ought to be paid to states for loss of revenues incurred due to GST implementation since 2017. However, the Union government did not transfer the amount from the Consolidated Fund of India (CFI), rather used it for “other purposes”, according to the CAG report. This short-crediting has violated the GST Compensation Cess Act, 2017.

As per media reports, the CAG also states that holding the money helped the government in overstating its revenue receipts and understating its fiscal deficit for the year.

“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,” CAG said in its report.

According to the CAG report, in the year 2017-18, total Rs 62,612 crore GST Compensation Cess was collected, out which Rs 56,146 crore was transferred to the non-lapsable fund by the Department of Revenue. Later in 2018-19, Rs 54,275 crore out of ₹95,081 crore GST compensation cess collected was transferred to the fund.

There was a short transfer of Rs 6,466 crore in 2017-18 and Rs 40,806 crore in 2018-19, which the Centre used for “other purposes” according to the national auditor.

This development has come just a week after Finance Minister Nirmala Sitharaman declared in the Parliament that there was no provision in the law to compensate states for a loss of GST revenue out of the CFI.

The report also added that the Ministry of Finance accepted the audit observation and in February 2020 stated the proceeds of cess collected and not transferred to Public Account would be transferred in the subsequent year.

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The GST (Compensation to States) Act guarantees an annual growth rate of 14% to all states during the period between July 2017 to June 2022. If any state’s revenue growth is slower than 14%, the Centre is required to compensate for shortage through the funds collected as compensation cess. The Centre collects this GST compensation cess by levying taxes on certain luxury goods and then transfer the amount into the Consolidated Fund of India. It is then transferred to the Public Account of India through which states received a compensation from the collected GST compensation cess fund.