Successive Union governments have been imposing cess, the most recent being Swachh Bharat cess, Krishi Kalyan cess and infrastructure cess. When the Krishi Kalyan and infrastructure cess were announced in the Finance Bill, 2016, finance ministry officials said these would be phased out once the good and services tax (GST) was implemented. One hoped with the advent of GST, the multitude of indirect taxes would be subsumed. But that seems far from happening. The GST Council appears to have found convergence over the imposition of yet another cess.
Though the cess' name is yet to be coined, based on the details available, it seems this would be levied on "sin" or luxury goods such as tobacco, big cars, pan masala, aerated drinks, among others. The proceeds would be used to compensate states for revenue losses suffered in the first five years of the GST regime. The anticipated corpus needed to compensate states was estimated at Rs 50,000 crore. About Rs 26,000 crore would be provided out of the existing clean environment cess.
This proposal is problematic on various counts. First, cesses are not general revenue-raising measures. Compensating states from such proceeds goes against the spirit of a cess. Second, merging the proceeds of the clean environment cess into this corpus would constitute diversion of funds. Third, there is already a cess on tobacco, found to be inefficient.
Cess, in general, has met with criticism from various quarters.
So what is a cess and what can it be imposed for? The Constitution refers to different kinds of levies - taxes, fees, surcharges and cess, each unique and different. The unique feature of a cess, as explained by the Supreme Court, is it is levied for a specific purpose. When the Union government chooses to impose a cess, the proceeds are not required to be shared with the states. Not surprisingly thus, cess has emerged as a popular measure with Union governments.
In the current financial year, cess forms a staggering 9.24 per cent of the total tax revenues. States seem angry at being deprived of the tax revenues.
The rationale for cess proceeds not having to be shared can be found in the Finance Commission reports.
The Eighth Finance Commission disallowed sharing cess proceeds with states on grounds that it would result in diverting funds for unintended purposes. If the proposed "sin" cess is used to compensate states - whatever the chosen "specific purpose" - it would be rendered nugatory. The specific purpose of the cess cannot be compensating states, as this would make it look more like a tax or a general-revenue raising measure. In fact, the proposal seems antithetical to the very idea of a cess.
Also, equally egregious is the proposal to merge the funds raised from the clean environment cess. The purpose of the clean environment cess is the "financing and promotion of clean environment and energy initiatives". If, in disregard to such express purpose, proceeds are utilised for the corpus to compensate states, would it not amount to diversion of funds? The Comptroller and Auditor General of India has reported only 43 per cent of the proceeds collected under the head of clean energy cess (now renamed as clean environment cess) have been appropriated to the National Clean Energy Fund. Governments must attempt to find sufficient clean energy initiatives to fund rather than palm off the funds to other causes.
Tobacco is one of the items proposed to be covered under the proposed "sin" cess. But there is already a cess on the production of Virginia tobacco under the Tobacco Cess Act, 1975, which the Law Commission has recommended should be repealed for being economically inefficient. Many others kinds of cess have come under fire for being inefficient and poorly administered. CAG reports reveal proceeds collected under various Union cess have not been appropriated for the specific purposes. It would be advisable for the Centre and the GST Council to thus tread the cess path cautiously.
Though the cess' name is yet to be coined, based on the details available, it seems this would be levied on "sin" or luxury goods such as tobacco, big cars, pan masala, aerated drinks, among others. The proceeds would be used to compensate states for revenue losses suffered in the first five years of the GST regime. The anticipated corpus needed to compensate states was estimated at Rs 50,000 crore. About Rs 26,000 crore would be provided out of the existing clean environment cess.
This proposal is problematic on various counts. First, cesses are not general revenue-raising measures. Compensating states from such proceeds goes against the spirit of a cess. Second, merging the proceeds of the clean environment cess into this corpus would constitute diversion of funds. Third, there is already a cess on tobacco, found to be inefficient.
Cess, in general, has met with criticism from various quarters.
So what is a cess and what can it be imposed for? The Constitution refers to different kinds of levies - taxes, fees, surcharges and cess, each unique and different. The unique feature of a cess, as explained by the Supreme Court, is it is levied for a specific purpose. When the Union government chooses to impose a cess, the proceeds are not required to be shared with the states. Not surprisingly thus, cess has emerged as a popular measure with Union governments.
In the current financial year, cess forms a staggering 9.24 per cent of the total tax revenues. States seem angry at being deprived of the tax revenues.
The rationale for cess proceeds not having to be shared can be found in the Finance Commission reports.
The Eighth Finance Commission disallowed sharing cess proceeds with states on grounds that it would result in diverting funds for unintended purposes. If the proposed "sin" cess is used to compensate states - whatever the chosen "specific purpose" - it would be rendered nugatory. The specific purpose of the cess cannot be compensating states, as this would make it look more like a tax or a general-revenue raising measure. In fact, the proposal seems antithetical to the very idea of a cess.
Also, equally egregious is the proposal to merge the funds raised from the clean environment cess. The purpose of the clean environment cess is the "financing and promotion of clean environment and energy initiatives". If, in disregard to such express purpose, proceeds are utilised for the corpus to compensate states, would it not amount to diversion of funds? The Comptroller and Auditor General of India has reported only 43 per cent of the proceeds collected under the head of clean energy cess (now renamed as clean environment cess) have been appropriated to the National Clean Energy Fund. Governments must attempt to find sufficient clean energy initiatives to fund rather than palm off the funds to other causes.
Tobacco is one of the items proposed to be covered under the proposed "sin" cess. But there is already a cess on the production of Virginia tobacco under the Tobacco Cess Act, 1975, which the Law Commission has recommended should be repealed for being economically inefficient. Many others kinds of cess have come under fire for being inefficient and poorly administered. CAG reports reveal proceeds collected under various Union cess have not been appropriated for the specific purposes. It would be advisable for the Centre and the GST Council to thus tread the cess path cautiously.
The writer is assistant professor and assistant director, Centre for Comparative and International Taxation at Jindal Global Law School