IASbhai Daily Editorial Hunt | 3rd Oct 2020
I am not a product of my circumstances. I am a product of my decisions.– Stephen Covey
EDITORIAL HUNT #170 :“CAG Audit Report 2020 Analysis | UPSC“
M. Govinda Rao
CAG Audit Report 2020 Analysis | UPSC
M. Govinda Rao is Chief Economic Adviser, Brickwork Ratings. He was former Director, National Institute of Public Finance and Policy, and Member, Fourteenth Finance Commission.
Flagging cess non-transfer, its economic impact
The C&AG’s observations in its financial audit report relate to the denial of States’ share in the divisible taxes pool
SYLLABUS COVERED: GS 3: Tax : Economy
CAG Audit 2020 Report has raised alarms on devolution of funds with Centre and State. Substantiate -(GS 3)
- CAG Observations
- GST Shortfall
- Cess collection and distribution.
- COMPENSATION CESS : The Opposition-ruled States have criticised the Centre on the short transfer of Goods and Services Tax (GST) compensation cess revenues to the GST Compensation Fund.
- CLUTCHED AMOUNT : Thus, a total of ₹47,272 crore was retained in the Consolidated Fund of India (CFI).
- RETAINED IGST : The report also alluded to the non-apportionment of a portion of Integrated Goods and Service Tax (IGST) among the States and retaining it in the CFI.
BOOSTS CLAIM BY STATES
- MORE FUEL TO THE FIRE : At a time when Union government’s refusal to compensate States for the shortfall in the collection of GST as per the agreement the C&AG’s report has only added more fuel to the fire.
- CONCERNS : These States contend that when there were surplus collections, the Union government appropriated them and when there is a shortfall, it simply distances itself, instead asking States to borrow.
LEVY OF CESSES
- MACROECONOMIC SIGNIFICANCE : The C&AG’s observations on a non-transfer of cesses, however, has a much larger macroeconomic impact.
- TOTAL CESS : There are as many as 35 cesses levied by the government of India.
- PURPOSE OF CESS : These are earmarked taxes and the proceeds should be used for the purposes for which they are levied.
- CESS COLLECTIONS : A number of reserve funds or development boards have been created for these specified purposes and the collections from the cesses .
- CESS DISTRIBUTION : They are supposed to be transferred to these funds placed in public accounts for defraying expenditures on the specified purposes.
- CESS AND CFI : They are not a part of the CFI and cannot be used for defraying regular expenses.
- TOTAL TRANSFERS : The C&AG has pointed out that in 2018-19, the collections from 35 Cesses amounted to nearly ₹2.75-lakh crore of which only ₹1.64-lakh crore was transferred to various reserve funds .
- SHORT TRANSFER : Thus, the short transfer to the Public Account during the year amounted to ₹1.11-lakh crore payment.
PROCESS BECOMES OPAQUE
- PRINCIPLE : Cesses are earmarked taxes and to ensure a minimum allocation to important and priority programmes, this method of financing could be used.
- ABOLITION OF CESS : Even after a number of cesses and surcharges were abolished when the GST was implemented.
- TAX COMPLIANCE : The ostensible reasoning for levying these cesses is the belief that ring fencing of revenue for specified priority purposes may evoke greater tax compliance for the people .
- COLLECTION PATTERNS : There is also a possibility of limiting the funding of important and priority areas to the amount of cess collected even when they require much larger amounts.
- COMPLEXITY: Too many cesses also complicate the tax system and add to administrative and compliance costs.
- DEVOLUTION OF FUND : Article 270 of the Constitution requires the Union government to distribute the proceeds from all Central taxes listed in the Union List based on the recommendation of the Finance Commission.
- EXCLUSIONS : However, Article 271 excludes the distribution of the revenue from any surcharge or cess levied by the Union government for any specified purpose.
- SHARE OF STATES : After the Fourteenth Finance Commission recommended that the share of the States in the divisible pool be pegged at 42%, almost all discretionary increases in taxes were done by levying cesses and surcharges.
- DEPRECIATION : But decreased to 32% in 2019-20.In the current year, it could be less than 30% .#Pandemic
- ROLE OF FC : As the Finance Commissions are appointed once in five years, the Union government can raise additional revenue from taxes mainly through the levy of cesses and surcharges to avoid sharing them with the States.
SOURCES: THE HINDU EDITORIAL HUNT | CAG Audit Report 2020 Analysis | UPSC