The Finance Ministry has dismissed allegations of "diversion" of Rs 47,271 crore from the GST Compensation Cess Fund - a non-lapsable fund into which GST cess is transferred and from which compensation is paid to states - and said all amounts due to state and union territories for 2017/18 and 2018/19 had been fully paid.
The time taken in reconciliation of compensation receipts, Finance Ministry sources said, could not be called "diversion... when dues to states were fully released by the central government".
Concerns about the GST Compensation Cess Fund were raised after a report by the Comptroller and Auditor General (CAG) said the government had wrongly retained around Rs 42,000 crore of GST compensation cess.
In its report the CAG pointed out that according to law the amount collected as GST cess for the year is to be transferred to the GST Cess Fund for distribution to states as compensation for loss of revenue.
The report said that in 2017/18 the transferred amount was short by Rs 6,466 crore and, the following year, it was short by Rs 40,806 crore. The combined amount, the CAG said, "became available for use for purposes other than what was provided in the Act".
Finance Ministry sources, however, pointed out that per the law all amounts, including taxes and cesses, collected by the centre must first be credited in the Constitution Fund of India (CFI) and only thereafter be transferred.
Sources said that since the final amounts collected are known only at the end of the financial year, any amount collected over and above estimated collections, would remain, temporarily, in the Consolidated Fund of India (CFI).
"Therefore, such temporary retention of GST cess in CFI, pending reconciliation, cannot be treated as diversion by any stretch of imagination," one ministry source said.
The Finance Ministry also pointed out that the CAG had not mentioned "diversion" of funds, but simply that there was an apparent error in reconciliation.
GST compensation has emerged as a sore point with state and union territory governments this year, particularly with the adverse economic impact of the Covid pandemic and lockdown.
The centre is finding it difficult to pay states compensation - due if a state's revenue grows slower than 14 per cent - because states have not earned much this year due to months of lockdown necessitated by the COVID-19 crisis.
The Congress had called the delay in paying GST compensation a "sovereign default" and going back on constitutional guarantees that were the reason states came on board with the GST regime. Several opposition-ruled states, including Bengal and Kerala, have been similarly upset.
After a meeting of the GST Council earlier this year, state and UT governments were asked to borrow - either the full amount of Rs 2.35 lakh crore (which included Covid relief) or Rs 97,000 crore (which was only GST compensation).
Last week several states and UTs submitted their borrowing proposals.
With input from PTI