CAG findings on IGST sharing may strain Centre-state relations further

As per rules, IGST must be shared equally between Centre and states and union govt is bound to part with another 42% of its share as per 15th Finance Commission recommendations

The already strained relations between the Centre and states over the compensation mechanism under the goods and services tax (GST) may get strained further after the findings of the Comptroller and Auditor General of India (CAG) on sharing and devolution of the integrated goods and services tax (IGST) collections. 

According to GST rules which are clear on the matter, IGST has to be shared between the Centre and states in the ratio of 50:50 and the recommendations of the then 15th finance commission bind the union government to give a further 42 per cent from its share to the states.

In its report on the union government accounts tabled in Parliament recently CAG, however, found that a sum of Rs 13,944 crore was left unapportioned and retained in the Consolidated Fund of India (CFI) in 2018-19  though the amended IGST Act now provides for a process for ad-hoc apportionment of IGST. 

The auditor said no reasons were provided by the Department of Revenue for non-apportionment of this balance amount.

"As a result of the continued adoption of the erroneous process of devolution of IGST to states and retention of unapportioned balance in the CFI instead of first apportioning IGST between the Centre and states/UTs and then devolving States’ share from the amount apportioned to the Centre, States had overall received less funds on account of IGST," CAG said. 

This also implies that tax receipts of the union government were overstated to that extent and the revenue deficit understated during the year, it deduced.

CAG recommended that the devolution/apportionment of IGST and its accounting, be reviewed and aligned with the extant constitutional and statutory provisions. 

The Centre and states are already singing different tunes over compensation mechanism to the latter this year as the compensation cess is expected to fall short of the requirement to the tune of Rs 2.35 trillion. 

The Centre gave two offers to states -- Rs 97-crore RBI window and Rs 2.35 crore borrowing by the states. While the states are not required to pay interest in case of the first option, they will have to  pay interest in the second option. 

The Centre got the support of 21 states for its first option which can enable it to pass this decision in the GST Council scheduled for October 5, in case of voting. However, any voting on this controversial issue would create bad blood between the Centre and the states. 

A tax expert on the condition of anonymity said the CAG findings will make the Centre-state relations worse.