Data indicates that the share of Cesses & Surcharges in the Gross Tax Revenue of the Government of India has increased from around 10% in 2011-12 to more than 25% in 2021-22. While this increase results in states losing out in their share of the divisible pool, underutilization of the collected cesses & surcharges is also a cause for concern.
In the state’s annual budget for 2023-24, the Kerala government announced that it proposes to levy a Social Security Cess on liquor, petrol, and diesel. A cess of Rs. 20 to Rs. 40 on liquor and Rs. 2 on petrol and diesel has been proposed by the government. The cess proposed on fuel is expected to bring an additional revenue of Rs. 750 crores to the Social Security Seed Fund. However, this has led to protests by the opposition in the state. Not just in Kerala, cess is levied even by the Government of India (GoI) for various purposes such as education, infrastructure, etc. It is imposed as an additional tax besides the existing tax and so, the burden is on the taxpayers. Against this backdrop, we look at what cess is and the different cesses being imposed by the Union Government, and what the increase in revenue through cesses & surcharges means for states.
A cess is an additional tax levied by the Government to raise funds for a specific purpose that it is earmarked for. For instance, the government levies a Road and Infrastructure cess, and the revenue generated through this cess is to be used to fund road and infrastructure development activities. Surcharges are a tax on tax, with the same purpose.
Cess for specific purposes need not be shared with states
Article 270 of the Constitution of India lays down what taxes may be included in the divisible pool or those which should be divided among the Union and State governments. Following an amendment in 2000, Cess levied for ‘specific purposes’ under any law passed by the Parliament is exempted from the divisible pool. In simple terms, cess and surcharges are levied by the Union Government for the purposes of the Union under Article 271 of the Constitution of India. The proceeds of the revenue earned via various cess & surcharge would not become part of the divisible pool and hence, would not be shared with the states.
Over 42 Cesses were levied at different points of time since 1944
According to a study report submitted to the Fifteenth Finance Commission, from 1944 until 2019, over 42 cesses were levied at different points in time. As per the report, the first cess levied was on ‘Matches’. Cesses are levied for multiple reasons such as for the development of a specific industry, labour welfare, and social security, among others. Some of the major cesses that are levied by the Union Government currently include Cess on Exports, Cess on Crude Oil, Health & Education Cess, Road & Infrastructure Cess, GST Compensation Cess, etc.
Since the implementation of Goods and Services Tax (GST) in July 2017, many cesses like Krishi Kalyan Cess, Swachh Bharat Cess, Clean Energy Cess and Cesses on Tea, Sugar, and Jute, etc. were subsumed into GST. Likewise, Health and Education Cess was rolled out since 2017-18 in place of Primary Education and Secondary Education Cess on direct taxes. Also, unlike other Cesses collected by the Central government, States get a share GST Compensation Cess. The ‘GST Compensation Cess’ was constituted to compensate States which lose out on revenue due to the introduction and implementation of GST.
Share of Cess and Surcharges in Gross Tax Revenue of GoI has increased significantly in the recent years
According to a response of the Finance Ministry in the Lok Sabha in December 2022, in 2020-21, India’s Gross Tax Revenue was Rs. 20.27 lakh crores and the revenue collected through cess and surcharges constituted 25.1% of this amount. Data from the XV Finance Commission’s report also reveals that the share of cess and surcharges in the country’s gross tax revenue has increased considerably in the last 11 years- from 10.4% in 2011-12 to an estimated 28.1% in 2021-22. A significant increase in the share of cess and surcharges is evident in recent years since 2018-19.
Finance commission cited increase in charges and introduction of new cesses as reasons for increase in share of Cess & Surcharge in GTR
The finance commission’s report cited the following major reasons for higher receipts from cesses and surcharges in 2018-19 as
- Increase in the health and education cess on income tax from 3-4%
- Introduction of a road and infrastructure surcharge
- Imposition of social welfare surcharge of 10% per cent on the aggregate duties of customs and imported goods instead of erstwhile education and higher education cess of 3% on imported goods.
In 2019-20, the rate of surcharge on income tax for individuals with income between Rs. 2 crores and Rs. 5 crores has been increased from 15 to 25% and for individuals earning more than Rs. 5 crores, the rate of surcharge has been increased from 15 to 37% which may have contributed to the increasing share. In 2020-21, the central excise duty, cesses and surcharges levied and collected per litre on petrol and diesel were increased by Rs. 10 and Rs. 13, respectively.
Cess collected on Petrol, Diesel, and Road and Infrastructure doubled in 2019-20
The Finance Ministry also provided details of major Cesses (in operation) collected/realized during 2013-14 to 2020-21 and 2021-22 in the Parliament in response to questions. According to these responses it can be noted that:
- The collections under GST Compensation Cess have increased from Rs. 62,596 crores in 2017-18 to Rs. 1.047 lakh crores in 2021-22
- The receipts of additional excise duties on Indigenous Motor Spirit (Petrol) and HS Diesel have doubled in 2020-21 as compared to 2019-20 which may be attributed to the increase noted earlier.
- In 2020-21, the collections of road and infrastructure cess were almost Rs 1.24 lakh crores, up from Rs. 67,373 crores in 2019-20.
- The cess collected on exports dropped from Rs. 9215 crores in 2020-21 to Rs. 1457 crores in 2021-22
- National Calamity Contingent Duty has also doubled over the years
- Agriculture Infrastructure and Development Cess was proposed in Budget 2021-22 and generated Rs. 76,950 crores
It has to be noted that the primary and education cess and secondary and higher education cess were merged after budget 2018-19 as Health and Education Cess. The Road and Infrastructure Cess was also introduced in 2017-18.
While cess and surcharges have reduced devolution to states, underutilization of the collected amount is also a cause of concern
In the past, the Comptroller & Auditor General (CAG) has highlighted that the under-utilization of the cess is a cause of concern. In a financial audit report for 2018-19, CAG observed that only Rs.1.64 lakh crores of the Rs. 2.74 lakh crores i.e., around 60% of the amount received in the form of around 35 cesses, levies & other charges during 2018-19 were transferred to the respective ‘Reserve funds & boards’. Around 40% is still retained in the Consolidated Fund of India. Significantly Rs. 382 crores thus retained belongs to 17 cesses that were abolished or subsumed into GST.
According to a study by PRS Legislative Research, contrary to the XV Finance Commission’s stated share of 41% for the states in the divisible pool of central taxes, an increase in the incidence of levy of cesses and surcharges by the central government in recent years has resulted in the notable decline in the devolution to states as a share of gross tax revenue. In 2022-23, states’ share in gross tax revenue of GoI is estimated to be only at 30% while the XV Finance Commission envisaged a devolution share of 41%.