The Comptroller and Auditor General of India has found that the Centre violated its own law on the Goods and Services Tax regime 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, The Indian Express reported on Thursday.

The auditor said the Centre used this money for “other purposes”, which “led to 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.

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.

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.

However, 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”.

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.