24th July 2021

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Compensation Cess Fund fiasco

The CAG recently raised objections to the transfer of money from the Cess Fund to the Consolidated Fund of India, calling the transfer illegal. He showed how the central deficit could have been underestimated by the bad signing.

What are these controversial funds?

  • Under the GST law, the amount collected from the collection of fees during the year is credited to a non-cancellable fund called the GST Expense Compensation Fund.
  • It is part of the public account and is used to compensate the states in case of loss of income.
  • The Consolidated Fund of India is an account that includes income received by the government through tax or non-tax revenue and expenses incurred by it, excluding exceptional items.
  • Following the CAG’s findings, the Center clarified that it had transferred funds to the compensation fund and paid all costs through 2019-2020.

What are the problems with compensation?

  • The Comptroller and Auditor General of India said that transferring the surplus from the Compensation Fund to the Consolidated Fund was illegal.
  • The report comes at a time when the Center has reached consensus on the issue of GST compensation to states due to severe financial stress caused by the covid-19 pandemic and the corresponding closures.
  • According to the law, the central government had guaranteed 14% revenue growth to the states and cover any budget deficits resulting from the implementation of the GST by collecting compensation.

Can the government transfer the surplus from the compensation process?

  • Legally, the Center cannot transfer funds that exceed the compensation fee. The observations made by the CAG were well recognized by the government.
  • For example, in fiscal year 20, total tax revenue was ₹ 95,444 crore, while ₹ 1,65,302 crore was delivered to the states. The Center then transferred the balance of Rs 69,858 million to the Cess Compensation Fund.

What about the fund’s surplus?

  • The current legal structure requires that any surplus from the initial fund be kept in the fund for future deficits. In other words, the background cannot be used by the government for any other purpose, but only for the purpose of providing compensation to States.
  • However, this needs to be reexamined, even more so in the post-covid phase. The current solution to the GST compensation problem was to allow states to borrow while using the right of compensation to bear the cost.

What does this mean for center-state relations?

  • This development will have implications for center-state relations, as several states have raised objections regarding the transfer of surpluses to the consolidated fund.
  • The key issue would be to restore trust between the Center and States. The solution found on the issue of GST compensation due to foreclosure is a positive development as it illustrates the willingness of stakeholders to find solutions. Therefore, cooperative federalism will remain the key in the future.
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