Centre must respect fiscal federalism and legal obligations under GST (Compensation to the States) Act, 2017

Centre Must Respect Fiscal Federalism and Legal Obligations under GST (Compensation to the States) Act, 2017

Statement from Civil Society Organisations, Economists and Concerned citizens 

New Delhi, October 2, 2020: Financial Accountability Network India (FAN India) and the undersigned condemn the central government for violating the GST (Compensation to the States) Act and diverting the GST cess funds to show higher revenues in order to reduce the fiscal deficit, as reported by the CAG in its report tabled in the parliament on September 23.

According to the GST (Compensation to the States) Act 2017, the central government should provide for compensation to the states for loss of revenue arising out of implementation of GST for a period upto five years. As per these provisions, it was agreed by the central government that the states should be compensated for any shortfall in getting a revenue of 14 percent over the base year (2015-16) revenue relating to taxes/ duties subsumed into GST. The GST compensation is payable bi-monthly and should be calculated finally for every financial year after the receipts of final revenue figures as audited by the Comptroller and Auditor General (CAG) of India.

As per the Article 266(2) of the Constitution, the GST Compensation Act and the approved accounting procedure, the entire cess collected during the year, is required to be transferred to the GST Compensation Cess Fund in Public Accounts. However, from the Finance Accounts 2017-18 and 2018-19, it was found that there was a short transfer of Rs. 6,466 crore and Rs. 40,806 of GST Compensation Cess to the GST Compensation Cess Fund.

The central government collected Rs 62,612 crore in 2017-18 and Rs 95,081 crore in 2018-19 but only transferred Rs 56,146 crore and Rs 54,275 crore to GST Compensation Cess Fund in both the years respectively, keeping (short-credit) a total of Rs 47,272 in Consolidated Fund of India to use for other purposes.

The CAG report, states that “The short-crediting was a violation of the GST Compensation Cess Act, 2017. 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”. The report further stated that “Short crediting of cess collected during the year led to overstatement of revenue receipts and understatement of fiscal deficit for the year”.

Another extremely worrying part is the efforts to present a picture that the GST compensation was being devolved to states as if these receipts were “grants-in-aid”, whereas the agreed-upon accounting process clearly had asked the Finance Ministry and Controller General of Accounts to book such transfers to the state under the Major Head ‘2047-Other Fiscal Services’. However, as per the Finance Accounts 2017-18, no such entry was found in the major head 2047. The reasons for the same were called for (February 2019) from the Ministry and their reply was awaited, stated the CAG Audit report on Indirect Taxes (Goods and Services Tax) for the year ending 31st March 2018.

During the audit of the Finance Accounts for the year 2018-19, CAG of India found that “Ministry of Finance operated the major head ‘3601-Transfer of Grants in Aid to States'”. National Auditor expressed such continuous errors despite the approved accounting process for the disbursement of GST Compensation and stated, “The wrongful operation has implications on the reporting of Grants in Aid, since the GST Compensation Cess is the right of the State and is not Grant-in-Aid”. “. Having noted their displeasure of non-compliance with the approved accounting process, “Ministry of Finance to take immediate corrective action”.

Rather than correcting such gross accounting mistakes, Finance Ministry appears to have chosen to gloss over these concerns from the national auditor by arguing that “short term retention of GST Compensation Cess receipts pending reconciliation cannot be termed as ‘diversion’” and planting such arguments through friendly media. We understand this as an effort to confuse the people and would urge the finance minister to address media through PIB or issuing an official press release.

We urge the GST Council and the Finance Ministry to ensure unhindered access to the complete universe of transactions to constitutional auditor so that the latter can perform its constitutional obligations fully. As we understand from the CAG audit report on State Finances that have entered the public domain during the monsoon session full access had not been provided to CAG of India.

The union government and Controller General of Accounts had failed to present the clear and transparent picture on the GST Compensation Cess. Financial Accountability Network India along with other civil society organisations, trade unions, bankers, people’s movements and networks strongly demand the Ministry of Finance should immediately address the violations of GST Compensation Cess Act raised by CAG and provide the details of funds diverted to show higher revenue and less fiscal deficit.

We also wish to urge all the fellow citizens, including those who have an added constitutional duty of ensuring fiscal federalism and perform this duty by being judges in the Supreme Court of India that the constitutional auditor has pronounced the opinion without mincing words in a simple sentence in the audit report that reads: “The short-crediting was a violation of the GST Compensation Cess Act, 2017”. When the constitutional audit institute pronounced its opinion in such an unambiguous statement, the constitutional court must come in and take the matter to its logical conclusion by issuing appropriate directions.

This only stands as yet another attack on federalism and fiscal federalism by the central government. When the states where demanding the due compensation while struggling to fight the pandemic, the central government refused to acknowledge that there were problems in their accounting processes and they had retained what was rightfully the share of state governments in last three years but instead called the pandemic an “Act of God” and tried to recuse itself from constitutional laws by asking state governments to borrow from RBI.

Financial Accountability Network India demands that instead of looking for ways to bypass the constitutionally mandated laws, the central government must immediately release the GST compensation due to the states, especially at a time when states are facing severe funds crunch due to the COVID pandemic.

Endorsed by:

  1.  Arun Kumar, Retired Professor, Jawaharlal Nehru University
  2.  Jayati Ghosh, Professor, Jawaharlal Nehru University
  3.  M G Devasahayam, Ex-IAS / Chairman, People First
  4.  Jyotsana Jha, Director, Centre for Budget and Policy Studies, Banglore
  5. Prakash Louis, Coordinator PJMS, Uttar Pradesh
  6. Vinod Vyasulu, Centre for Budget and Policy Studies, Bangalore
  7.  Sanjeev Chandrokar, Associate Professor, TISS Mumbai
  8. Devidas Tuljapurkar, General Secretary Maharashtra State Bank Employees Federation, Mumbai
  9. Ashok Choudhary, General Secretary, All India Union of Forest Working People (AIUFWP)
  10. Ashish Kothari, Activist
  11. Gautam Modi, General Secretary, New Trade Union Initiative
  12. J John, Social Security Now, New Delhi
  13. Soumya Dutta, Trustee MAUSAM
  14. Sreedhar Ramamurthy, Environics Trust
  15. Thomas Franco, Joint Convenor, People First
  16. Ulka Mahajan, Sarvahara Jan Andolan
  17. Rohit Aazad, Assistant Professor, Jawaharlal Nehru University
  18. Avinash Kumar, Assistant Professor, Jawaharlal Nehru University
  19. Suresh, Dhopeshwarkar, All India Bank Employees Association Mumbai, Maharashtra
  20.  Ponniah Rajamanickam, General Secretary, All India People’s Science Network
  21. Vijayan MJ, General Secretary, PIPFPD, New Delhi
  22. Meera Sanghamitra, National Alliance of People’s Movements (NAPM)
  23. Maduresh Kumar, National Alliance of People’s Movements (NAPM)
  24. Parimala Panchatcharam, Forum for IT-ITEs Employees, Chennai
  25. RN Bhaskar, Consulting Editor, Free Press Journal, Mumbai
  26. Krishna Kumar, President, Mysore Education Society, Bangalore
  27. Rohit Prajapati, Environment Activist
  28. Rajendra Ravi, Institute for Democracy and Sustainability
  29. Anil TV, Delhi Forum
  30. Sanjeev Danda, Dalit Adivasi Shakti Adhikar Sangathan (DASAM)
  31. Saswati, Mineral Inheritors Rights Association, New Delhi
  32. Bharat Patel, Machimar Adhikar Sangharsh Sangathan, Kutch, Gujarat
  33. Vidya Dinker, INSAF/Growthwatch, Mangalore
  34. Kamayani Bali Mahabal, Jan Swasthys Abhiyan Convenor, Mumbai
  35. Eldred Tellis, Sankalp Rehabilitation Trust, Mumbai
  36. Rajkumar Sinha, Bargi Bandh Visthapit Avam Prabhavit Sangh
  37. Anita Kapoor, Shehri Mahila Kamgar Union, New Delhi
  38. Prakash Bhandari, Himdhara, Palampur, Himachal Pradesh
  39. Mukta Srivastava, Social Activist, Thane
  40. Sumesh Mangalasseri, Kabani Eco Tourism
  41. Sujata Madhok, Journalist, New Delhi
  42. Radhika Desai, Independent Researcher and Consultant: Gender and Social Inclusion
  43. Dr Sudhir Vombatkere, National Alliance of People’s Movements (NAPM), Mysuru
  44. Rajesh Kumar, Delhi Solidarity Group
  45. Himsi Singh, National Alliance of People’s Movements (NAPM), HImachal Pradesh
  46. Ashok Maridas, Listening Post, Bangalore
  47. Neena Shah More, Housewife, Maharashtra
  48. Inchara Shanthappa, Concerned Citizen, Mumbai
  49. Prasad Chacko, Independent Consultant, Ahmedabad
  50. Uttaran Bhunia, Architect, Goa
  51. Aditya Naique, Freelance Android Developer, Goa
  52. Lawrence Surendra, Karnataka
  53. Sunil Rap, Entrepreneur, Mysore
  54. Persis Sinawalla, Gujarat
  55. Tanushree Gangopadhyay, Journalist, Gujarat
  56. Himanshu Upadhyaya, Faculty, School of Development, Azim Premji University
  57. Joe Athialy, Centre for Financial Accountability
  58. Priya Dharshini, Financial Accountability Network India


For more information, please contact:
Ashish Kajla
Financial Accountability Network India (FAN India)
+91 9650164543
[email protected]

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