System of Cess In India

The latest audit of the Union Government’s accounts tabled in Parliament has revealed that about 40% of all the cess collections in 2018-19 have been retained in the Consolidated Fund of India (CFI).

Cess

• Cess is a tax levied for a specific purpose and ought to be used for the same only.
• A cess is usually imposed additionally when the state or the central government looks to raise funds for specific purposes.
• The government levies an education cess to generate additional revenue for funding primary, secondary, and higher education.
• Cess is not a permanent source of revenue for the government, and it is discontinued when the purpose of levying it is fulfilled.
• It can be levied on both indirect and direct taxes.
• The government can impose cess for purposes such as disaster relief, generating funds for cleaning rivers, etc.
• For example, after the Kerala floods in the year 2018, the state government imposed a 1% calamity cess on GST and became the first state to do it.

Types of cess in India

• Education Cess: Education cess was introduced to finance and provide standard quality education to poor people.
• Health and education cess: Proposed in Budget 2018 by Finance Minister Arun Jaitley to meet the education and health needs of rural and rural and Below Poverty Line (BPL) families.
• Swachh Bharat Cess: Introduced in 2015, a 0.5% Swachh Bharat cess was imposed to fund national campaigns for clearing the roads, streets and infrastructure of India.
• Krishi Kalyan Cess: This cess was aimed at developing the agricultural economy, and was collected at the rate of 0.5%.
• Infrastructure Cess: Announced in Union Budget 2016, this cess was charged on the production of vehicles.

Issues Related to Cess

• The report by Vidhi Centre for Legal Policy, submitted to the 15th finance panel, points out that the share of cesses and surcharges (a ‘tax on tax’) in gross tax revenue (GTR) increased from 7% and 2%, respectively, in 2012-13 to 11.9% and 6.4%, respectively in 2018-19.
• States have represented to the 15th Finance Commission that their share in gross tax revenues has fallen on account of the rising component of cesses and surcharges on which they have no rights as per the 80th Amendment to the Constitution, pertaining to Article 270.
• According to the Comptroller and Auditor General of India (CAG), while 17 cesses and other levies were subsumed into the GST, 35 levies still remained in force.

Tax and Cess

• Cess is different from taxes such as income tax, GST, and excise duty etc as it is charged over and above the existing taxes.
• While all taxes go to the Consolidated Fund of India (CFI), cess may initially go to the CFI but has to be used for the purpose for which it was collected.
• If the cess collected in a particular year goes unspent, it cannot be allocated for other purposes.
• The amount gets carried over to the next year and can only be used for the cause it was meant for.
• The central government does not need to share the cess with the state government either partially or in full, unlike some other taxes.
• The procedure for introducing cess is comparatively simpler than getting the provisions done for introducing taxes, which usually means a change in the law.
• Cess is also easier to modify and abolish.

Way forward

• Absolute transparency is needed in the management of cess receipts so that Parliament and the people in order to avoid any subterfuge.
• Transparency and rationalism
• Abolition
• Imposition