States Don't Like It, Centre Can't Do Without It; Cess Regime Not Going To Go Away Soon

Then comes the most vexatious part -- how to bridge the difference between projected revenue and projected expenditure. This is further compounded by what the Fifteenth Finance Commission termed as 'budget marksmanship’ – unrealistic budget projections. As the Commission pointed out, during the past 10 years, the actual tax collections were on an average 4 per cent less than what was budgeted. It is against this background that raising revenue from cess has come to play an important role in budgetary affairs of the government.

By way of background, it may be mentioned that Article 270 of the Constitution enables the Union Government to levy cess for a ‘specific purpose under any law made by Parliament’. Thus, what Article 270 in effect permits is that the Centre gets to retain the cess so collected. The cess itself is levied under the specific provisions of each Act -- for instance, the Road & Infrastructure Fund Act, or unless specifically mentioned otherwise when it is collected as a duty of central excise or customs. Article 271 empowers Parliament to levy a surcharge on any taxes which fall within the Union Government's taxing powers.

The introduction of the Goods & Services Tax (GST)in July 2017 was expected to end all taxes and cess fees with their getting subsumed into the new levy. That was the USP of GST. Hence in the days leading to the launch of GST from July 1, 2017, every general budget witnessed the abolishing of certain cesses.

The Union Budget 2015-16 abolished education cess on taxable services; the 2016-17 Budget saw the cess on cement, strawboard, iron ore mines, manganese ore mines and chrome ore mines, tobacco and cine workers welfare being abolished. The Budget 2017-18 abolished research & development cess. Further, cess on, rubber, automobiles, tea, coal, beedis, water consumed by certain industries, sugar, jute goods, clean energy, SwachhBharat, infrastructure and Krishi Kalyan were also abolished by suitable amendments.The suggestion being that with the advent of GST no cess will be levied. Subsequent developments revealed that this was not to be.

The government had to resort to the GST Compensation Cess along with the advent of GST. While this was understandable and a necessary sweetener to bring all the States on board given the importance of the transformational tax reform, the continuation of some cesses and the introduction of new cesses was not. The very next Union Budget of 2018-19 saw the concept of Road Cess being enlarged and rechristened as the Road and Infrastructure Cess, the three per cent Education cess being replaced by a four percent Health and Education cess and the introduction of a Social Welfare Surcharge. This trend has since continued and only grown.

Cess Has A Long History

First levied on matches in the late 1940s, the focus then shifted for development of specific industries. Cesses are meant to be fully utilised for the purpose for which they are levied. They are excluded from the divisible pool and do not get shared with the States. The Union government is expected to merely act as a custodian of funds so collected as a cess till they are appropriated for the mandated purpose. Again, the implication is that cess cannot be indefinitely imposed. Once the purpose is served the levy of cess should cease. The reasons for this are several. It is a tax on tax; no input tax credit is available on the cess element of tax paid. It adds to costs and the States do not get any share.

In response to a Starred Question (No.167 answered on August 2, 2022) in parliament, Finance Minister Nirmala Sitharaman provided the details of the major cesses collected/realised during the preceding three years. There were seven cesses and surcharges operational at the time of the question being answered -- Health & Education cess, Road & Infrastructure Cess, National Calamity Contingent Duty, Cess on Crude oil, Cess on Exports, Agriculture Infrastructure & Development Cess and Health Cess.

Over and above these, there is the GST Compensation cess and the surcharge on Income Tax, paid by both companies and individuals, as was confirmed by the Minister of State for Finance in response toan unstarred parliamentary question in early 2023.

The Report of the Auditor General of the accounts of the Union Government, Report No.21 of 2023 (Financial Audit)8 gives the details of the cess collection as part of the total collection of revenue. A sizeable 17.7 per cent of the total gross revenue in FY 2021-22, came from cesses including the GST Compensation cess. In the Union Budget FY 2022-23, the share of cess revenue declined to 12.1 per cent -- a sharp drop, but still a significant share.

The drop was on account of lower collection of road & infrastructure cess as the government slashed excise duties on petrol and diesel in order to curb inflation. The amount collected from Road and infrastructure cess fell from from Rs. 1,95,987 crores in 2021 -22 to Rs. 58,200 crore in 2022-23. Total Cess collections were estimated atRs.3,67,130 crore of cess is substantial.

A 2020 report of the Comptroller and Auditor General of India on the Accounts of the Union Government had pointed out that in respect of the Road & Infrastructure Cess, Health & Education Cess and the Cess on Crude oil, there was no proper framework, nor any assurance that the money collected would be used for the purpose for which these were collected. The CAG had observed that the Union Government had withheld more than Rs. 1,10,000 crore collected through various cesses in 2018-19.

The CAG report also pointed out that more than Rs 1,24,000 crore collected as Cess on Crude Oil over the last decade had not been transferred to the designated Reserve Fund — the Oil Industry Development Board — and had instead been retained in the Centre’s coffers.

As the Parliamentary Standing Committee on Transport, Tourism and Culture mentioned in a February 2022 report, which reviewed the Central Road and Infrastructure Fund Works, there is no fixed share of apportionment as of now for the cess so collected. The Fund is administered by the Department of Economic Affairs. A committee headed by the finance minister determines the distribution of revenue from the cess.

The 15th Finance Commission had approvingly quoted from the CAG’s report: "The Comptroller and Auditor General (C&AG) has drawn our attention to the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses. Similarly, surcharges are meant to be levied only for short periods. A majority of the State Governments are of the view that cesses and surcharges should either be eliminated or, if continued beyond a specified period, should form part of the divisible pool. "

Similarly the Commission commented on the increase in collections under cess: "The underlying spirit for levying the cess is to serve a specific purpose and provide necessary financial impetus to a particular sector/area of the economy."

The 69th Report of the Public Accounts Committee 2023-241 has in its report titled "Issues Relating to Accounting of Cess/Levies" noted the observations made by CAG about short transfer of funds, non-finalisation of accounting procedures, non-transfer/utilisation of cess, non-creation of separate fund in respect of several cesses. The PAC has desired that cess should be specific and time bound, that there is need for transparency and accountability and that a special audit of the utilisation of the proceeds from collection of various cesses be conducted.

On what the government was doing with the cess collected, it may be mentioned that the finance minister has, in her August 2022 response to the starred question cited earlier, said that more than what has been collected as cess has been spent. In October this year, the finance minister reiterated that the "Union Government is not keeping cess for itself".

The discussions above would, however, suggest that this is not happening. Cess has become for the Union Government an important measure of revenue collection. While both direct and indirect tax collections are doing well, the fact remains that the Government has also committed itself to huge capital expenditure towards infrastructure development. The fact also remains that the revenue deficit is mounting. Disinvestment is way behind the target --only 13.6 per cent of the budgeted target has been met so far.

So, while ideally all cesses should cease, it is not going to happen soon. The least that can be ensured is that it is indeed used for the purpose for which it is being collected.

(Najib Shah is former chairman, Central Board of Indirect Taxes and Customs. Views expressed are personal)