On July 20, 2022, the Comptroller and Auditor General of India (CAG)’s report on Kerala’s finances for the fiscal year 2020-21 was tabled in the state assembly.Amongst several other observations, this report has noted how funds being kept outside the ‘Consolidated Fund’ of the state. The context here is the manner in which Kerala treats cess receipts under the Building and Other Construction Workers’ Welfare Cess Act, 1996 (BOCW Cess Act).The observations raise some pertinent questions around accounting principles and the national auditor’s role in enforcing accountability. However, when examined against the letter and spirit of the BOCW Cess Act, these comments give off an air of mere nitpicking.Indeed, even as it engages in such technical nitpicking, a careful reading of the report makes it clear that the CAG has failed to ensure compliance by Kerala BOCW Board with regard to timely submission of its annual accounts for audit certification.Raising its concern over non-remittance of levies into consolidated fund of the state, the CAG of India states:“The provisions of Rule 5 of the Building and Other Construction Workers’ Welfare Cess Rules (1998) provided that the cess collected (at a rate of minimum one percent of cost of construction) is to be transferred to the Kerala BOCW Board under the accounting procedure of the state. Audit observed that no rules have been framed by the State Government of Kerala for accounting of Building and Other Construction Workers’ Welfare Cess. Neither a Sub-Head has been opened for transfer of cess amount to Building and Other Construction Workers’ Welfare Board by various Departments/ Agencies etc. The Cess amount collected is not routed through the Consolidated Fund of the State as required under Article 266(1) of the Constitution of India and is instead being credited directly to Special Treasury Savings Bank account of the Board/ Accounts in Nationalized banks maintained by the Board.” (emphasis added) (p. 121-122)What would be at stake if Kerala state government frames accounting procedures that would route BOCW cess amount through the consolidated fund of the state? In my opinion, the audit observation that indirectly offers advice for treatment of BOCW cess receipts as revenue receipts of the state, commits a cardinal sin of mis-reading both Article 270 of the Constitution of India granting the state the powers to impose cess (i.e. an earmarked tax) and mis-reading the specific cess act, namely BOCW Cess Act.Explaining cesses or earmarked taxes in a recently published academic paper, Ashrita Prasad Kotha and Pradnya Talekar said:“Earmarking is the act of setting aside revenues for specific public purposes unlike general fund financing where budgetary proceeds may be used for any public purposes. Earmarking is prevalent in other countries too, such as the United States of America and Australia. In the Indian context, the term ‘cess’ is used to describe a levy for ‘specific purposes’ as described under Article 270 of the Indian Constitution. It is thus, an instance of an earmarked tax constitutionally permitted to be levied in India”.Thus, what follows from such an understanding of a ‘cess’ as a specific fiscal levy is that there is a clear expectation that when it comes to the money collected, the state government merely acts as a trustee or custodian. It cannot appropriate the proceeds as if it were state’s revenue receipts, creating a general purpose fiscal resource pool that can be used by the finance minister to decide where to allocate it to. Also read: In India, a Cess a Day Keeps Governance AwayIf the BOCW cess would become part of the consolidated fund of the Kerala state government, how would CAG ensure that the cess receipts do not get merged with the general purpose fiscal pool and get spent on purposes not supported under the specific purpose cess legislation? Another corollary question that CAG auditors must answer is, how will the national auditor protect the Kerala BOCW Board, if there were a short-transfer of cess receipts to the board by the state government?In the recent CAG report on Gujarat (State Finances) for the year ending 31st March 2021, we come across the following observation:“In terms of BOCW Cess Act, the State Government levied and collected cess amounting to Rs 3,466.87 crore during the period 2006-07 to 2020-21 and transferred Rs 2,129.69 crore to Gujarat BOCW Board as grants-in-aid, leaving a balance of Rs 1,337.18 crore which had not been transferred as of 31 March 2021. Further, of Rs 452.92 crore collected during 2020-21 as BOCW cess, only Rs 115.84 crore was transferred to the Board, leaving a balance of Rs 337.08 crore which was not transferred to the Board in violation of BOCW Cess Rules, 1998” (p. 68).It is pertinent to add that Rule 5(3) of BOCW Cess Rules, 1998 states in clearly worded, unambiguous words that “the cess so collected is to be transferred to BOCW Board within 30 days of its collection!” If a construction worker picks up CAG of India’s Audit report on Gujarat (state finances) for previous fiscal years, I am sure, she may come across a similar audit observation in previous audit reports also.We also need to understand the specific historicity of the enactment of cess legislations to understand that ‘specific purpose’ is raison de etre of the cess instrument. If the ‘specific purpose’ is obliterated, the very ground on which the cess legislation was imposed disappears. Such reading of Article 270 of the Constitution providing State the powers to impose ‘specific purpose’ cess would make us feel that cess receipts must not flow into Consolidated fund of the State Government under Article 266(1), since doing so would alter the very idea of earmarking the fiscal resources. At the most, the CAG may have a ground for asking the state government to account cess receipts under a separate accounting head created under Public Account of the State, as per Article 266(2) of the Constitution and making sure that the cess so received becomes available to the Board within 30 days, as per Rule 5(3) of the BOCW Cess Rules, 1998. God forbid, if Kerala takes the route of accounting the cess receipts as part of Consolidated Fund of the State Government as revenue receipts and then the state government indulges in short-transfers of cess receipts to the Board similar to what we have seen in the case of Gujarat, all that the CAG would do is to voice his displeasure by pointing out such short-transfers in audit paragraphs year after year after year, without ensuring any course correction. The cess legislations – in the present case Building and Other Construction Workers’ Welfare Cess Act – may also outline the structure of fund management authority and other parameters on financial accountability. So, the next logical question that CAG of India shall ask is: “What does the relevant cess legislation prescribe on the fund management authority and legislative control over the same?”The Building and Other Construction Workers’ Welfare (Regulation of Employment and Conditions of service) Act, 1996 has the following compliance requirement when it comes to the accounting and auditing of the cess fund/ BOCW board accounts:“Section 27: Accounts and Audit(i) The Board shall maintain proper accounts and other relevant records and prepare an annual statement of accounts in such form as may be prescribed in consultation with the Comptroller and Auditor General of India(ii) The Comptroller and Auditor General of India or any other person appointed by him in connection with the auditing of the accounts of the Board under this Act shall have the same rights and privileges and the authority in connection with such audits as the Comptroller and Auditor General of India has in connection with the auditing of the Government accounts, and in particular shall have the right to demand the production of books, accounts, connected vouchers and other documents and papers and to inspect any offices of the Board under this Act.(iii) The accounts of the Board shall be audited by the Comptroller and Auditor General of India annually and any expenditure incurred in connection with such audit shall be payable by the Board to the Comptroller and Auditor General of India (Emphasis added)(iv) The Board shall furnish to the state government before such date as may be prescribed its audited copy of accounts together with auditor’s report.(v) The state government shall cause the annual report and auditor’s report to be laid, as soon as may be after they are received, before the state legislature.”Ironically, the same audit report tells citizens that on July 14, 2021, Kerala Building and Other Construction Workers’ Welfare Board had submitted its annual accounts for the fiscal year 2019-20. Thus, the annual accounts for the fiscal 2019-20 got submitted to CAG for certification and auditing with delay amounting to 12 months and 14 days (see page 189 of the report).The latest separate audit report (SAR) on Kerala Building and Other Construction Workers’ Welfare Board which has entered public domain pertains to the fiscal year 2016-17 and it was tabled in assembly on June 13, 2019.Citizens, as well as MLAs and civil society organisations working in Kerala, do not have any idea about the CAG’s audit remarks on any of the annual accounts of the Kerala BOCW Board since 2016-17, as all the SARs for subsequent fiscal years have not yet entered public domain.It is imperative, for the cause of public finance and accountability, for the CAG to take steps to ensure Kerala BOCW Board’s compliance of the provisions of Section 27 (iii) of the BOCW Cess Act, 1996 and correct its misreading of Article 270 of the Constitution.Himanshu Upadhyaya is assistant professor at Azim Premji University, Bengaluru.
