Centre's share of cess and surcharges nearly double in three years

Experts say finance commission needs to provide clarity on whether cess should be shared with states

On December 20, the finance ministry revealed that the share of central cess and surcharges in yearly gross tax revenue had risen 10 percentage points between 2019-20 and 2021-22. This was a rather steep jump, given that most of the cess and surcharge amount is not shared with the states.

 

According to a reply by finance minister Nirmala Sitharaman in Rajya Sabha to Member of Parliament John Brittas, in 2019-20, the year before the share of cesses and surcharges was 18.2 per cent of gross tax revenue of 20.10 crore. In 2020-21, the year of peak pandemic, it was 25.1 per cent of gross tax revenue of Rs 20.27 per cent, and in 2021-22, it was 28.1 per cent of 25.16 per cent.

 

In absolute terms, cesses and surcharges were Rs 3.65 trillion, Rs 5.09 trillion and Rs 7.07 trillion in the three years respectively. That is a jump of Rs 3.42 trillion, or a staggering 93.7 per cent. For comparison, the share of states from gross tax revenue in 2021-22 was Rs 7.45 trillion.

 

For taxpayers, cesses are like additional regular taxes as these add to their overall burden of tax outgo.

 

However, for state governments, there is a significant difference between cesses and regular taxes like income tax or customs duties. The divisible pool of taxes which the centre has to share with states – as mandated by the Constitution - does not include cess and surcharges.

 

According to the provision under Article 270 of the Constitution of India, all taxes and duties referred to in the Union List shall be levied and collected by the Centre and shall be distributed between the Union and the state, except for specific duties and taxes, surcharge on taxes and duties and any cess levied for specific purposes under any law made by parliament.

 

As a result, while the Centre's overall revenue rises, the states receive no benefit from cesses. "This is the way the Centre is trying to increase the portion of the revenue which it doesn’t have to share. Whether it is right or not depends on whether it is permitted, which it is,” said Madan Sabnavis, chief economist with Bank of Baroda.

 

As the chart shows, in 2020-21, the share of states in central taxes actually reduced year-on-year, while the Centre’s cess and surcharges increased. To be fair, the GST compensation cess and portion of some other cesses are shared with the states, to be used for the reason they are levied under. However, most of the cesses and surcharges are not shared.

States have raised concerns

 

For this reason, the reliance of the Centre on cesses for generating additional revenue has been raised as a cause of concern by states on multiple occasions including the pre-Budget meeting steered by finance minister Sitharaman last month. During the meeting, states urged the central government to merge the cesses into the basic rates of tax so that the states receive their due share in devolution.

 

States with significant expenditure obligations depend heavily on central tax devolution as a source of revenue for carrying out these responsibilities. Prominent critics of the government including former West Bengal Finance Minister Amit Mitra have publicly accused the Centre of increasing cess and surcharges to deny the states their share.

 

The divisible pool includes all central taxes, excluding cesses and surcharges, which the Centre is constitutionally mandated to share with the States.

 

Some of the heads under which the Centre collects cess include the health and education cess, additional excise duties on petrol and diesel, road and infrastructure cess, national calamity contingent duty, cess on crude oil, cess on exports, agriculture infrastructure and development cess and GST compensation cess.

 

The central government transfers a part of cess proceeds to states under various reserve funds such as Prarambhik Shiksha Kosh, Clean Energy Fund, Mines Welfare Funds and Krishi Kalyan Kosh, apart from the GST compensation fund.

 

Clarity sought from Finance Commission

 

Public finance experts argue that the future finance commissions need to provide clarity on the whole issue.

“Conceptually, the money from cess and surcharges needs to be brought under a divisible pool. The concern of the states is legitimate,” said NR Bhanumurthy, vice-chancellor of Dr B R Ambedkar School of Economics University, Bengaluru. By this inclusion, states will get a bigger share of devolution from the Centre's net proceeds to meet their expenditure commitments, he said.

 

“It is only the finance commission which can provide such recourse and can recommend to the Centre to make cess part of the divisible pool,” Bhanumurthy said. Such a move will require an amendment to the Constitution by parliament.

Bank of Baroda’s Sabnavis agreed. “We have to go back to the finance commission to take a call on whether cess and surcharges should be part of divisible or not. There has to be clarity on that,” he said, adding that if the finance commission says that the Centre has the right to not share cess and surcharges, then it opens the door for states as well to have their revenue resources as well which they don’t have to share.

 

The 14th Finance Commission recommended that a constitutional amendment be brought to put the revenues collected from cesses under the divisible pool. There was no such specific point made by the 15th Finance Commission. The 16th Finance Commission is likely to be set up in 2024.