UPSC Relevance- Prelims Pointers:Definition and nature of cess vs. tax,Role of CAG in public finance auditing. Mains-GS Paper II: Government policies, accountability, statutory institutions (CAG).

Why in News?

The Comptroller and Auditor General of India (CAG), in its latest audit for FY 2023–24, has revealed that the Central Government failed to transfer ₹3.69 lakh crore collected as cess into the specific funds for which these levies were legally mandated.The shortfall spans multiple decades, with some cases dating back to 1974, and raises questions about fiscal discipline, transparency, and compliance with statutory provisions.

Background

Cess is a specific-purpose tax levied in addition to existing taxes. It is meant to finance a particular sector or development goal—for example, health, education, infrastructure, or sectoral development.

Key Features of Cess

• Levied under a specific Act or Finance Act provision.
• Proceeds must be credited to a dedicated, non-lapsable fund in the Public Account of India.
• Funds can only be spent for the purpose defined in law.

Failure to transfer collected cess into the designated fund constitutes non-compliance with statutory provisions and undermines the principle of earmarked taxation.

CAG’s Audit Findings

1. Oil Industry Development Cess

• Law: Oil Industry (Development) Act, 1974.
• Purpose: Finance the development of the oil industry via cess on crude oil and natural gas production.
• Collections (1974–2024): ₹2,94,850.56 crore (including ₹18,845.98 crore in FY 2023–24).
• Transfers to OIDB:
  • 1974–1992: Only ₹902.40 crore transferred.
  • No transfers after 1992 until Budget 2024–25 (₹17,730 crore) and proposed Budget 2025–26 (₹19,376 crore).
• Implication: The oil industry faced decades of underfunding despite steady cess collections, potentially impacting exploration, refinery upgrades, and technology modernisation.

2. Health & Education Cess

• History:
  • 2004: 2% Education Cess.
  • 2007: Additional 1% Secondary & Higher Education Cess.
  • 2018: Both replaced with 4% Health & Education Cess.
• CAG Finding:
  • Between 2018–2024, ₹37,537 crore collected not transferred to relevant funds.
  • Government claimed ₹3.66 lakh crore transferred—more than total collections—but CAG’s verification found only ₹2.65 lakh crore credited, highlighting the need for reconciliation of accounts.
• Impact: Reduced allocations to health and education schemes, undermining objectives such as improving literacy rates, infrastructure upgrades in schools, and expanding healthcare capacity.

3. Other Notable Shortfalls

• Investor Education & Protection Fund: ₹2,505.5 crore untransferred.
• Monetisation of National Highways Fund: ₹5,968.1 crore untransferred.
• These lapses affect investor protection initiatives and delay highway modernisation projects.

Implications of Non-Transfer

1. Transparency and Fiscal Accountability
   ○ Public trust in earmarked taxes depends on visible, purpose-driven spending.
   ○ Failure to transfer funds blurs the line between general taxation and specific-purpose levies.
2. Legal Non-Compliance
   ○ Violates provisions under respective Acts.
   ○ Could invite parliamentary scrutiny and judicial intervention.
3. Developmental Delays
   ○ Oil sector modernisation, health infrastructure upgrades, and educational reforms may have been underfunded.
   ○ Sectors dependent on these funds face structural inefficiencies.
4. Parliamentary Oversight – CAG’s report provides grounds for Public Accounts Committee (PAC) and Standing Committees to demand explanations and corrective action.

Way Forward

• Strict Compliance: Mandatory annual certification by CAG on cess transfers.
• Legislative Monitoring: Periodic review by Parliament of all dedicated funds.
• Transparency Portal: Public disclosure of cess collection and utilisation.
• Penal Provisions: Legal consequences for diversion or delay in fund transfer.

Conclusion

The CAG’s report exposes a systemic issue of fiscal indiscipline, where cesses collected for targeted welfare and infrastructure purposes were not fully credited to their respective funds. This practice not only undermines the credibility of earmarked taxation but also risks derailing sector-specific development initiatives. Immediate corrective measures—such as strict fund transfer timelines, transparent public disclosures, and parliamentary oversight—are necessary to restore trust and ensure that citizens’ tax contributions are used for their intended purposes.

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RM DOSE-About Comptroller and Auditor General of India (CAG)

The Comptroller and Auditor General of India (CAG) is one of the most important constitutional authorities in the country.
In simple words, the CAG is the guardian of the government’s money — making sure that every rupee collected from the people and spent by the government is used lawfully, honestly, and for the right purpose.

Dr. B.R. Ambedkar called the CAG “the most important officer under the Constitution”, placing it alongside the Supreme Court, the Election Commission, and the UPSC as a pillar of Indian democracy.

1. Constitutional Position

• The CAG’s office is established by Articles 148 to 151 of the Indian Constitution.
• It is independent of the government — meaning it cannot be influenced by ministers or bureaucrats.
• It heads the Indian Audit and Accounts Department (IA&AD) and works at both the Union and State level.
• Role:

Upholds the Constitution and laws in all matters of public finance. Ensures the executive (government) remains accountable to Parliament and State Legislatures.

Example:If the Ministry of Health spends money allocated for a vaccination program on unrelated foreign trips, the CAG will flag it in its audit report.

2. Appointment & Tenure

• Appointed by: The President of India through a formal warrant under their hand and seal.
• Oath: Swears to uphold the Constitution, preserve India’s sovereignty, and perform duties without fear or favour.
• Term: 6 years or until 65 years of age, whichever comes earlier.
• Resignation: Can resign by writing to the President.
• Removal: Can be removed like a Supreme Court judge — requiring a special majority in both Houses of Parliament on grounds of misbehaviour or incapacity.

Why removal is so strict:This ensures the CAG can criticise the government without fear of losing their job.

3. Independence Safeguards

The Constitution gives strong protections to ensure CAG’s independence:

• Security of tenure: Cannot be removed except by the strict constitutional process.
• No post-retirement jobs in Union or State governments — avoids temptation to please political leaders.
• Salary and service conditions: Fixed by Parliament and cannot be reduced to their disadvantage after appointment.
• Office expenses: Paid directly from the Consolidated Fund of India, not voted upon by Parliament — ensures the government can’t cut their budget in retaliation.
• Staff service rules: Decided by the President after consulting the CAG.

4. Duties & Powers

The CAG’s (Duties, Powers, and Conditions of Service) Act, 1971, along with the Constitution, defines what the CAG can do.

Main Duties

1. Audit of Government Accounts
   ○ Examines all expenditure from:
   ■ Consolidated Fund of India/States/UTs (main budget money).
   ■ Contingency Fund (emergency money).
   ■ Public Account (money the government holds in trust, e.g., provident fund deposits).
2. Audit of bodies funded by government
   ○ Covers organisations that receive substantial grants or loans from the government.

○ Example: If an NGO gets ₹50 crore from the Ministry of Rural Development, the CAG can audit how it was used.

3. Audit of government companies & corporations
   ○ Under the Companies Act and special laws for statutory corporations (like LIC, FCI).
4. Audit of revenue receipts
   ○ Ensures tax rules are followed and there’s no revenue leakage.
5. Audit of stock & stores
   ○ Checks physical goods like railway spare parts, defence equipment, etc.
6. Advisory role:
   ○ Advises the President on the form of government accounts (Article 150).
7. Reporting:
   ○ Submits reports to:
   ■ President (for Parliament)
   ■ Governor (for State Legislatures)
   ○ Under Article 151, these reports must be tabled before legislatures.
8. Certification:
   ○ Certifies the net tax proceeds under Article 279 — the final word on how much tax revenue is to be shared with states.

Audit Powers

• Can inspect any office where government money is involved.
• Can demand any document or record.
• Can question officers responsible for expenditure.
• Decides the scope and nature of the audit.

Example:If the Railways buys trains at inflated prices, the CAG can ask for tender documents, compare prices, and point out the loss to the exchequer.

5. Types of Audit

1. Legal/Regulatory Audit – Checks whether expenditure follows the law and budget approval.
   ○ Example: Spending money allocated for roads on building parks is illegal.
2. Propriety Audit – Questions if spending is wise, fair, and in the public interest.
   ○ Example: Using government money to buy luxury cars for ministers.
3. Performance Audit – Checks if money is spent efficiently and achieves intended results.
   ○ Example: Did ₹500 crore spent on skill training actually create jobs?
4. Supplementary/Concurrent Audits – For public sector undertakings, sometimes while projects are ongoing.
   Limitation: “Secret Service” expenditure (e.g., intelligence agencies) is audited only through a certificate from the department head.

6. CAG as Comptroller vs Auditor

• Comptroller role: Approves expenditure before it’s made.
• Auditor role: Checks expenditure after it’s made.
• In India — the CAG acts only as Auditor-General, not Comptroller.
• In the UK — the CAG does both roles.

8. Criticism (Paul H. Appleby’s View)

Paul Appleby, an American expert, called CAG a colonial legacy and said:

• Over-focus on fault-finding discourages decision-making.
• Parliament gives CAG too much importance without defining limits.
• Auditors may lack deep understanding of administration.

9. Key Challenges (2nd ARC Observations)

• Very few audit paragraphs discussed in PAC — only 15–20 out of 1000+.
• Weak follow-up on Action Taken Notes.
• State backlogs — reports pending for 10–20 years.
• Thousands of unattended inspection reports.
• Reports come too late — corrective action delayed.
• Over-reliance on paperwork, little physical verification.
• Overly negative tone — doesn’t separate genuine mistakes from corruption.
• Weak engagement with public and media.
• Little coordination between internal and external audits.
• Rarely audits NGOs despite big grants.

10. Way Forward

• Strengthen PAC efficiency — examine more audit paras.
• Ensure timely and meaningful follow-up.
• Set strict timelines for report submissions.
• Use technology — AI-based audit tools, real-time dashboards.
• Increase physical verification of assets.
• Report positives along with negatives.
• Train auditors on operational realities.
• Publish easy-to-read summaries for citizens.
• Coordinate internal & external audits.
• Audit NGO grants and climate finance regularly.

Consider limited pre-expenditure checks for high-value spending.

Upsc Mains pyq-

Q. “The Comptroller and Auditor General (CAG) has a very vital role to play.” Explain how this is reflected in the method and terms of his appointment as well as the range of powers he can exercise. (150 words, 10 marks)(2018)

Upsc prelims practice question-

Q. Regarding the Comptroller and Auditor General of India (CAG), which of the following statements are correct?

1. The CAG holds office at the pleasure of the President.
2. After retirement, the CAG cannot hold any government office.
3. In Parliament, the Finance Minister acts as the representative of the CAG.
4. The CAG can audit local body accounts if requested by the Governor.

How many statements given above are correct?
 (A) Only one
 (B) Only two
 (C) Only three
 (D) All four

Ans-(B)

SOURCE- THE HINDU

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