So here it seems another scam of India is in the making. The Comptroller and Auditor General of India has found that the Centre violated its own law on the Goods and Services Tax regime and spent a huge amount of money collected as GST for some “unknown” purposes. This is undoubtedly an unprecedented development by a ruling party that created the government with such a landslide mandate. In this article, we shall talk about all the issues related to this controversy and also find out how the GST system is already full of major drawbacks.
Centre used GST compensation cess elsewhere, violated law: CAG
— The Times Of India (@timesofindia) September 25, 2020
Here’s the Centre’s GST money misuse controversy explained in 7 points
1. What is the controversy about Centre misusing GST funds?
The Comptroller and Auditor General of India has found that the Centre violated its own law and retained Rs 47,272 crore of the GST compensation cess that meant to be used specifically to compensate states for loss of revenue, during the financial year of 2017-’18 and 2018-’19, as per reports. So where did this huge sum of money go? The CAG report informed that the Centre used this money for “other purposes”, which “led to an overstatement of revenue receipts and understatement of fiscal deficit for the year”. The short-crediting was a violation of the GST Compensation Cess Act, 2017.
2. How did the CAG report come to light?
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 on Wednesday. The report on erroneous transfers by the Centre also came a week after Finance Minister Nirmala Sitharaman told Parliament that there was no provision in the law to compensate states for the loss of GST revenue out of the Consolidated Fund of India.
3. What does the GST rule say?
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 a 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.
4. So how did the law violation take place?
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. “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. “Short crediting of cess collected during the year led to overstatement of revenue receipts and understatement of fiscal deficit for the year.”
The report stated that during 2018-’19, there was budget provision of Rs 90,000 crore for transfer to the Fund and an equal amount was budgeted for release to states as compensation. But even though the government collected Rs 95,081 during the year as GST compensation cess, the Department of Revenue transferred only Rs 54,275 crore to the Fund.
“From the Fund it paid out Rs 69,275 crore (inclusive of an opening balance of Rs 15,000 crore in the Fund) as compensation to the States/ UT,” CAG added. “This resulted in savings of Rs 35,725 crore on account of short transfer to the Fund and of Rs 20,725 crore on account of payment of compensation to the States/ UTs as against BEs of Rs 90,000 crore each for transfer and payment of compensation.” The auditor added that 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”.
5. What else does the CAG report reveal?
The CAG has also highlighted the violation of accounting procedure in the GST compensation cess. As per the approved accounting procedure, GST compensation cess was to be transferred to the Public Account by debit to Major Head “2047-Other fiscal services”, the report says. “Instead, Ministry of Finance operated the Major Head ‘3601-Transfer of Grants in aid to States’,” CAG said. The auditor said this wrongful operation has implications on the reporting of grants in aid, since the GST Compensation Cess “is the right of the States and is not a Grant in aid”. “It is recommended that Ministry of Finance take immediate corrective action,” it added.
6. What are the drawbacks of GST system?
There are multiple drawbacks in the GST system already. Here we list four of them.
A) There is almost zero physical verification provision. A GST registration number is automatically issued within 3 working days after details like PAN number, bank account number, company office address etc are uploaded online by the applicant. But as we just saw, these details can be bought to create fake firms. Yet, GST officials confirmed in a reportthat physical verification of details filed by applicants almost never happens.
B) The PAN numbers of known fake firms are not blacklisted. For instance, the PAN number used by Banke Bihari Enterprises was not blacklisted or blocked. So, the owner of that PAN number remains free to create another fake firm and evade more GST.
C) Suprisingly, GST authorities do not conduct backend verification of tax credits. Before releasing tax credit to any company, GST authorities should check back in the transaction chain whether the company has actually paid the GST. But this is not happening.
D) GST officers also told us that in this whole racked of faking invoices, the masterminds of fake firms normally escape. It’s the dummy person whose PAN numbers and bank details were misused, who gets caught.
7. What was the Centre’s stand on GST collection this year?
The centre was hard-pressed on paying GST dues to states that have not earned much this year due to months of lockdown necessitated by the COVID-19 crisis. GST collections including compensation cess to the states had been falling short of targets even before the coronavirus pandemic, making it difficult for the Centre to compensate the states. Twenty-one states gave their borrowing option proposed by the goods and services tax council to meet shortfall in compensation from the centre amid the coronavirus pandemic. These 21 states went with “option 1”, which allows them to borrow the tax collection shortfall due to the switch to the GST, estimated at ₹ 97,000 crore, by issuing debt under a special window coordinated by the Finance Ministry.
Centre should stop serving ultimatums to States. Centre government is only a member of the GST Council with 33.3 % of votes. It is the Council that has constitutional powers to take decisions. Call the Council immediately. Stop issuing threats.India is still a federal country.
— Thomas Isaac (@drthomasisaac) September 21, 2020
There was another option. “Option 2” allows states to borrow the entire compensation shortfall of ₹2.35 lakh crore, including the shortfall due to coronavirus crisis, by issuing market debt. If these remaining states do not give ttheir choices before another scheduled meet of the GST Council on October 5, then they will have to wait till June 2022 to get their dues, but on the condition that the GST Council extends the cess collection period beyond 2022. The GST Council is the highest decision-making body of the national tax introduced in July 2017.
But our question is so much rules and regulations for the states to follow to recover their GST money even amid the pandemic year which saw -23.9% GDP contraction. In such a year, the Centre has violated its own tax rules. Isn’t it a dejection and fraudulent behavior? We hope the Centre come up with a valid explanation to its people, otherwise it’ll lose its credibility.
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