cag-centre-broke-the-law-used-funds-for-gst-compensation-elsewhere

 

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Context: The Comptroller and Auditor General (CAG) of India has found that the government violated the GST Compensation Act, by retaining Rs 47,272 crore of GST compensation cess in the CFI during 2017-18 and 2018-19.

More on news:

  • The observations were made in a report on the accounts of the government for 2018-’19, tabled by the CAG in both Houses of Parliament.
  • 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 subsequent year”.
  • As per CAG, any transfer in the subsequent year would become an appropriation from the resources of that year and would require Parliamentary authorization.

Background:

  • The GST (Compensation to States) 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.
  • The collected compensation cess flows into the Consolidated Fund of India, 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.

Key takeaways of CAG report:

  • Short crediting of cess: Instead of transferring the entire GST cess amount to the GST compensation fund, the CAG found that the Centre retained these funds in the Consolidated Fund of India, and used it for other purposes.
    • It led to overstatement of revenue receipts and understatement of fiscal deficit for the year.
  • GST cess shown as Grants in aid: As per the approved accounting procedure, GST compensation cess was to be transferred to the Public Account by debit to Major Head ‘Other fiscal services’. 
    • Instead, the Ministry of Finance operated the Major Head ‘Transfer of Grants in aid to States’. 
    • It is wrong since the GST Compensation Cess is the right of the States and is not a Grant in aid.
  • Non utilization of cesses: The govt. has not transferred other cesses to their respective Reserve Funds, including the Road and Infrastructure Cess, Cess on Crude Oil, Universal Service Levy, and National Mineral Trust Levy.
    • Therefore the revenue/ fiscal deficit was understated.
    • Also, it made it difficult to ensure that the cesses etc., had been utilised for the specific purposes intended by the Parliament.

CAG

  • The functions of the Comptroller and Auditor of India are derived mainly from the provisions of Article 149 to 151 of the Constitution of India.
  • Functions:
    • Its main role is to audit and check accounts relating to all Union & state govt departments and offices, including Railways, Posts and Telecoms. 
    • It also scrutinises the accounts of companies owned or financed by the government.
  • Submission of reports:
    • The CAG submits its reports to various committees of Parliament and state legislatures, such as the Public Accounts Committee and the Committee on Public Undertakings.
    • These committees then scrutinize the reports.
    • The matter is then debated in Parliament and corrective action is taken.

Consolidated Fund of India 

  • It is the most important of all government accounts. 
  • This fund was constituted under Article 266 (1) of the Constitution of India. 
  • All revenues received by the government by way of direct taxes and indirect taxes, money borrowed and receipts from loans given by the government flow into the Consolidated Fund of India.
  • All government expenditure is made from this fund, except exceptional items which are met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without the Parliament’s approval.

Public Account of India 

  • It accounts for flows for those transactions where the government is merely acting as a banker.
  • This fund was constituted under Article 266 (2) of the Constitution. 
  • Examples of those are provident funds, small savings and so on. These funds do not belong to the government. 
  • They have to be paid back at some time to their rightful owners. 
  • Because of this nature of the fund, expenditures from it are not required to be approved by the Parliament.

Grants-in-aid 

  • They are payments in the nature of assistance, donations or contributions made by one government to another government, body, institution or individual. Grants-in-aid are given by the Union Government to State Governments and/or Panchayati Raj Institutions. 
  • Similarly, the State Governments also disburse grants-in-aid to agencies, bodies and institutions such as universities, hospitals, co-operative institutions and others. 

Cess: The Constitution allows the Centre to levy cess which the Centre need not share with state governments. Both cess and surcharge are meant to be temporary in nature.

  • Cess: Governments use Cess to fulfill a particular objective. Article 270 of the Constitution describes a cess. 
    • Cesses may be levied by the union or state governments.
    • Cess example:  an additional 4% Health & education cess is applicable on the income tax amount.
    • It is also typically imposed as a tax on tax – the Swachh Bharat Cess was a 0.5?d on to Service Tax.

Image source: Financial Express

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Q) The Comptroller and Auditor General (CAG) of India has found that the govt. has not transferred some cesses to their respective Reserve Funds. It made it difficult to ensure that the cesses etc., had been utilised for the specific purposes intended by the Parliament. Comment. (150 words)