C&AG’s report on GST compensation cess

Source- The Hindu

Syllabus- GS 3- Government Budgeting.

Context- In its audit report on the accounts of the Union Government, the Comptroller and Auditor General of India (CAG) has pointed out grave lapses in the accounting of revenue from the GST compensation cess.

What are the key findings of the CAG report related to cess?

1. Retained in the Consolidated Fund of India – The GST Compensation Cess with ₹47,272 crore, was not remitted to its rightful account over the first two years of GST.

• Union Finance Ministry quietly retained over 40% of all cess collections in 2018-19 in the Consolidated Fund of India (CFI).

2. Short transfer to the Public Account – As many as 35 different cesses, levies and charges yielded ₹2.75-lakh crore in the year, but just around ₹1.64-lakh crore was remitted to the specific reserve funds for which these cesses were levied.
3. Crude Oil Cess – Over 10 years, not a single penny of the ₹1.25-lakh crore of cess collected on crude oil was transferred to an oil industry development body it was meant to finance.
4. Central Road and Infrastructure Fund – Part of the hefty cess collected as additional excise duties on petrol and diesel, to finance roads and infrastructure, was similarly retained in the CFI.
5. A new 4% Health and Education Cess on income tax was partly deployed towards education, but no fund was created for health. Same with a Social Welfare surcharge levied on customs.

What is the mechanism of utilization of compensation cess?

Transfer of reserve funds– Cesses and levies collected are required to be first transferred to designated Reserve Funds and utilized for the specific purposes intended by Parliament.

• Funds collected through Central taxes along with cesses and other levies go to the CFI.
• Taxes and surcharges in CFI are parked in a divisible pool and 42% of the total is given to States as devolution.

What are the major reasons for the proliferation of cesses in India?

Inter- governmental fiscal arrangement-

1. Lack of transparency- Article 271 excludes the distribution of the revenue from any surcharge or cess levied by the Union government for any specified purpose, revenues from these sources do not form part of the divisible tax pool and are thus not shared with states. The lack of transparency in the accounting of these funds is undesirable.
2. Complexities in Tax structure- There are as many as 35 earmarked cesses, it is difficult to see all of them as priority areas requiring protection of funding. Too many cesses also complicate the tax system and add to administrative and compliance costs. There are debated over whether such levies are in sync with a nation trying to simplify its tax regime.

• The operation of the cesses involving collections and transfer to designated funds in the Public Accounts makes the entire process opaque as the operation of these funds too needs to be monitored and audited.

Way forward

Taxes in democratic societies indicate the presence of a collective socio-economic vision aimed at improving livelihoods. Since a cess is introduced with a specific purpose, it is unjustified when the proceeds remain unutilized for so many years. It is high time that the government immediately begins utilizing cess proceeds. Importantly, it should also publish an annual account of the manner in which they have been utilized.