Did Modi Govt Divert States’ GST Dues?

GST Dues

As several states continue to be on loggerheads with the Centre over GST dues, the new CAG report showing diversion of GST cess has put the government on backfoot and hints at lack of transparency.

In the last GST council meeting about a month back, the Centre placed two options before the states that have been demanding their dues from the GST compensation cess fund. Neither of the options involved the Centre actually paying the GST dues, instead it asked the states to borrow – either from the markets, facilitated by the Centre and RBI, or via an RBI special window. The GST shortfall for FY ‘21 was estimated around Rs 2.35 lakh crore and Finance Minister Nirmala Sitharaman called the economic crisis ‘an act of God.’

A few days back came out the findings of a Comptroller and Auditor General report which said that the Centre has diverted a portion of the GST compensation cess, which was originally to be transferred to the states. The usage of GST compensation cess fund for other purposes is in violation of the GST Compensation Cess Act, 2017.

What is GST cess fund?

According to the GST (Compensation to States) Act, from July 2017-June 2022, all states are guaranteed an annual growth rate of 14 percent in their GST revenue. If the growth is slower than 14 percent, the Centre should compensate for it from the GST compensation cess fund. This mechanism was brought in place to handhold the states through the implementation of GST and to make up for the losses meanwhile.  

The amount which is collected by levying a cess on a few luxury products first goes to the Consolidated Fund of India (CFI) and then to a non-lapsable GST compensation cess fund.

What did the Centre do?

According to the CAG report, in the first two years of GST implementation – FY 18 and FY 19 – the Centre retained a portion of the collected cess amount in CFI instead of transferring it to the GST compensation cess fund and thereby to the states. The retained amount was used for purposes that were not listed in the GST Act. The result was an overstatement of revenue receipts and understatement of fiscal deficit for the year, as per the CAG.

How much?

Rs 90,000 crore was budgeted to be released to the states as GST compensation during FY 19. Rs 95,081 crore was collected as GST compensation cess.

But out of this, only Rs 54,275 crore was transferred to the GST cess fund. Including the opening balance of Rs 15000 crore in the fund, the states received only Rs 69,275 crore in place of the Rs 90,000 crore. The rest was retained in the CFI and diverted towards other purposes as per CAG.

The findings come about a week after the finance minister told Parliament that there was no provision in the law to compensate states for the loss of GST revenue out of the CFI.

The larger picture

The CAG report isn’t about the diversion of GST funds alone. 

According to it, in FY 19, the Centre collected Rs 2.8 lakh crore from 35 cesses/levies which was to be allocated to previously earmarked areas. “Such cesses and levies are required to be first transferred to designated Reserve Funds and utilised for the specific purposes intended by Parliament,” says the report. However the government transferred only Rs 1.6 lakh crore. The remaining was used for general expenditure. 

Similar to the GST cess, a portion of the ‘Road and Infrastructure Cess’ collected during the year too was utilised for non-related purposes. The report also notes that Rs 1.2 lakh crore collected as a cess on crude oil and natural gas for the Oil Industry Development Board, has been retained in the CFI instead of transferring it to the designated Reserve Fund. Another finding in the report shows that “Social Welfare Surcharge” on Customs amounting to Rs 8,871 crore was collected, but no dedicated fund was envisaged. Only 60 percent of the amount collected from such cess and levies was transferred to the relevant funds in FY 19, hinting at a lack of transparency.

In a similar instance in 2014, the CAG report showed that a significant portion of the cess collected under the USO Fund for providing telecom services in rural areas was never transferred. The latest report carries a mention of this. “The issue of short transfer of the levy to the USO Fund had been brought out in successive reports of the CAG on the Union Accounts for the years 2009-10 to 2014-15 but is yet to be corrected,” it says.

Government’s response?

With the next GST council meeting set to take place on 5 October and several states criticising the government on its position on the GST dues, the CAG report has put the Centre on a backfoot. 

While the CAG notes that the Ministry of Finance has accepted the audit observation, and has stated that “the proceeds of cess collected and not transferred would be transferred in the subsequent year,” the finance ministry has denied any violations. 

According to sources in the ministry ‘temporary retention of GST compensation receipt in CFI pending reconciliation’ cannot be termed as diversion.

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