Centre diverted GST compensation funds, observes CAG; Shiv Sena alleges 'breach of trust'

As per its report on the accounts of the Union government tabled in Parliament on Wednesday, the Comptroller and Auditor General of India held that the Centre violated the GST Compensation Cess Act, 2017. This law mandates that the entire cess collected during the year must be credited to the GST Compensation Cess Fund for providing compensation to the states for loss of revenue. However, the CAG observed that the Modi government retained Rs.47,272 crore of the collected cess in the Consolidated Fund of India during 2017-18 and 2018-19. 

This violation of the law comes amid the Finance Ministry's directive to the states to borrow for meeting the shortfall in GST compensation. Moreover, Union Finance Minister Nirmala Sitharaman had replied in the Lok Sabha on September 18 that there is no provision in law to compensate states for the loss of GST from the Consolidated Fund of India. The CAG maintained that GST Compensation Cess is the right of the states and not a "Grant in aid". 

Source: Accounts of the Union Government, No. 4 of 2020 (Financial Audit)

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The report adds that the cess that was short credited became available for use for purposes other than what was provided in GST Compensation Cess Act, 2017. According to the CAG, this resulted in overstatement of revenue receipts and understatement of fiscal deficit for the year. It recommended the Finance Ministry to take corrective action. Additionally, the report mentions that the Finance Ministry had accepted the audit observation stating that “the proceeds of cess collected and not transferred to Public Account would be transferred in subsequent year”.

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Centre's two options for the states

The Finance Ministry suggested that states could borrow Rs.97,000 crore (the revenue shortfall arising on account of GST implementation and not taking into account COVID-19) with the entire principal and interest repayment of the debt to be met through cess collection in subsequent years. Furthermore, the states have been allowed to borrow an additional 0.5% points under the FRBM Act. But if the states opt to borrow the entire amount of Rs. 2.35 lakh crore, only the principal amount shall be repaid from the cess. In such a scenario, the states will have to bear the interest burden. 

Several states such as Delhi , Jharkhand, West Bengal ,Tamil Nadu, Kerala,Telangana, Maharashtra and Chhattisgarh have urged the Centre to rethink the GST compensation options. Reacting on the CAG's observation, Shiv Sena MP Priyanka Chaturvedi contended that the Centre was stealing from the state's GST dues to hide its own failures. She said that this dealt a huge blow to the state's faith in the Union government to honour its commitment. Chaturvedi opined that asking states to borrow in such a scenario is criminal. 

Read: 13 States Submit Borrowing Option To Centre To Fund GST Shortfall

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