CESS - ECONOMY

CESS - ECONOMY

News: States ask Centre to curb its cess habit at pre-budget meeting 

What's in the news?

●       Several States, including some governed by the BJP, on November 25 urged the Centre to rein in its reliance on raising revenues through cesses and surcharges which reduce their share in the divisible pool of taxes.

●       They also sought greater fiscal support to help revive the economy and reiterated demands for extending the Goods and Services Tax (GST) compensation period.

●       Tamil Nadu Finance Minister P. Thiaga Rajan noted that the share of cesses and surcharges had grown from 10.4% of gross tax revenue in 2011-12 to 26.7% in 2021-22.

CESS:

●       A cess imposed by the central government is a tax on tax, levied by the Government for a specific purpose.

●       Generally, cess is expected to be levied till the time the Government gets enough money for that purpose.

●       For example, a cess for financing primary education - the education cess (which is imposed on all Central Government taxes) is to be spent only for financing primary education (SSA) and not for any other purposes.

●       If the purpose for which the cess is created is fulfilled, it should be eliminated

Difference between cess and usual tax:

1. Cess imposed as a additional tax:

●       A cess is different from the usual taxes like excise duty and personal income tax as it is imposed as an additional tax besides the existing tax (tax on tax). 

●       For example, the education cess of 3% on personal income tax of 30% is imposed as a tax on the prevailing 30%. As a result, the total tax rate goes up to 30.9% (30% basic rate + 3% (cess) of the 30%).

●       But some cess like the Swachh Bharat Cess (SBC) is imposed as percentage tax on total value. Here the SBC is 0.5% of the value of the services.

2. Cess needs to get appropriation from the parliament:

●       Another difference between cess and the usual tax is the way in which tax revenue from cess is kept.

●       Revenue from main taxes like Personal Income taxes are kept at Consolidated Fund of India (CFI). The government can use it for any purpose.

●       But the tax revenue from Cess is first credited to the CFI and the Central Government may, after due appropriation made by Parliament, utilize the money for the specified purposes.

●       For example, the proceeds are kept as Central Road Fund (CRF) in the case of fuel cess (on petrol and diesel). The revenue collected is initially credited to the CFI and after adjusting for the cost of collection, Parliament, through its appropriation bill, credits such proceeds to the Central Road fund.

3. No share for states:

●       Another major feature of cess like surcharges is that the Centre need not share it with states.

●       But regarding all other major taxes they come under the divisible pool and hence they shall be shared with the states with the recommendations of the Finance Commission.

Current cess:

●       At present, the main cess are: education cess, road cess or (fuel cess), infrastructure cess, clean energy cess, krishi kalyan cess and swachh bharat cess.

Surcharge:

●       Surcharge is a charge on any tax, charged on the tax already paid.

●       As the name suggests, surcharge is an additional charge or tax.

●       The main surcharges are that on personal income tax (on high income slabs and on super rich) and on corporate income tax.

●       From the revenue side, surcharges are important as around 35% of all cesses and surcharges comes from the surcharge on direct taxes.

Surcharge on income tax:

●       A surcharge of 10% on personal income tax when the basic personal income tax rate is 30%. Effectively this surcharge of 10% raises the combined tax burden to 33%. This will be the method of calculating tax of a person whose income is above Rs 1 crore also. But here, the surcharge will be 12%.

COMMONALITY BETWEEN SURCHARGE AND CESS:

●       A common feature of both surcharge and cess is that the centre need not share it with states.

DIFFERENCE BETWEEN CESS AND SURCHARGE:

Following are the difference between the usual taxes, surcharge and cess.