Data: Share of Cesses & Surcharges in Gross Tax Revenue Falls to 14.5% in 2023-24, Down from The High of 20.2% in 2020-21

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The increasing share of cesses & surcharges in the gross tax revenue of the Government of India has been a cause for concern for states as they do not form part of the divisible pool. Data shows that the share of cesses & surcharges in the gross tax revenue has reduced from a high of 20.2% in 2020-21 to 14.5% in 2023-24 on account of reduced duties on petrol & diesel.

In India, the complexity of the tax system extends beyond regular taxes. The use of cesses and surcharges has become an increasingly common tool for the government to raise funds, often directed towards specific sectors like education, healthcare, and infrastructure development. While these additional levies are intended to support targeted initiatives, they have sparked concerns about their impact on the country’s fiscal balance, particularly in relation to the distribution of revenue between the Union and State governments.

Article 270 of the Constitution of India lays down what taxes may be included in the divisible pool or those which should be distributed 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. 

Source: Lok Sabha

Cess is levied for a specific purpose while surcharge is entirely at the discretion of the Union government

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, etc. 

A surcharge is an additional charge or tax levied on an existing tax, rather than on the taxable income or transaction itself. It is imposed by the government to generate extra revenue, typically targeting high-income individuals or specific goods and services. Unlike in the case of cess, a surcharge does not require the government to specify its intended use at the time of levy. The revenue collected from surcharges is entirely at the discretion of the Union government, which means it can be used for any expenditure as deemed necessary.

Many cesses were subsumed into GST

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 in 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 of the GST Compensation Cess. The ‘GST Compensation Cess’ was constituted to compensate States which lost out on revenue due to the introduction and implementation of GST. 

Share of Cesses and Surcharges in GTR increased considerably until 2020-21 and then declined

Data on the share of cesses and surcharges in gross tax revenue has been collated from multiple sources such as the Finance Commission’s report, budget documents, and parliament answers. It should be noted that the GST compensation and GST revenue have been excluded from the calculation. According to this data, the share of cesses and surcharges in the country’s gross tax revenue almost doubled between 2011-12 and 2020-21, from 10.4% to 20.2%. However, since 2021-22, the share has dropped to 14.5% in 2023-24. In short, the average share of cess and surcharges in gross tax revenue has been the most at one-fifth in 2020-21 and fell to less than 1/6th in 2023-24.

According to the finance commission’s report, the following are some of the major reasons for higher receipts from cesses and surcharges in 2018-19 as

Amount collected through surcharges tripled in 2022-23

A closer look reveals that the amount collected through cesses alone has dropped since 2022-23. Cesses which constituted more than 85% in the previous years accounted for only 65% in 2022-23 and 2023-24. The amount collected through surcharges more than tripled in 2022-23 to Rs. 1.25 lakh crores as compared to Rs. 40,747 crores in 2021-22. Meanwhile, the amount collected through cesses was Rs. 3.52 lakh crores in 2021-22 which fell to Rs. 2.25 lakh crores in 2022-23.

In 2019-20, the rate of surcharge on income tax for individuals with income between Rs. 2 crores and Rs. 5 crores was increased from 15% to 25%, and for individuals earning more than Rs. 5 crores, the rate of surcharge was increased from 15% to 37%. These may have contributed to the increasing share of surcharges. However, the highest surcharge under the new regime has been reduced to 25% from 37% in the 2023-24 budget.

Cesses collected on crude oil, and health and education have increased over the years

The trend in the collection of major cesses between 2013-14 and 2023-24 is varied. Except for the primary education cess and secondary & higher education cess, the remaining are currently in operation. As mentioned earlier, primary education cess and secondary and higher education cess were merged after budget 2018-19 as ‘Health and Education Cess’. Also, ‘road and infrastructure cess’ here includes the additional duty of excise on petrol and diesel, which were known as ‘road cess’ before the introduction of ‘road and infrastructure cess’ in 2017-18. 

The trends reveal the following:

CAG and FC have raised concerns on cesses and surcharges

In its report, the 15th Finance Commission noted that the divisible pool as a percentage of the gross revenues of the Union has been consistently falling as more and more resources are raised through non-shareable cesses and surcharges. It added that states agreed that the Finance Commission should work out a mechanism so that the 50:50 division should objectively account for the cess and surcharges currently retained by the Union from gross revenues.

The 14th Finance Commission had also highlighted the somewhat problematic growing share of cesses and surcharges in Union revenues. Meanwhile, the Comptroller & Auditor General (CAG) highlighted that the under-utilization of the cess was 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 (around 60%) received in the form of around 35 cesses, levies & other charges during 2018-19 were transferred to the respective ‘Reserve Funds & Boards’. Around 40% was retained in the Consolidated Fund of India. 

The debate surrounding these levies underscores the need for greater accountability and a balanced revenue-sharing approach. This includes reconsidering the inclusion of cesses and surcharges in the divisible pool to ensure fair resource distribution with states.