Cessed out

Introduction:

Cess is a tax levied for a specific purpose and ought to be used for the same only.
The process of cess levying occurs after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.
The latest audit of the Union Government’s accounts tabled in Parliament has revealed that about 40% of all the cess collections in 2018-19 have been retained in the Consolidated Fund of India (CFI).

About Cess:

Different from the usual taxes and duties like excise and personal income tax, a Cess is imposed as an additional tax besides the existing tax (tax on tax) with a purpose of raising funds for a specific task.
For example, the Swachh Bharat cess.
The Union government is empowered to raise revenue through a gamut of levies, including taxes (both direct and indirect), surcharges, fees and cess.
A cess, generally paid by everyday public, is added to their basic tax liability paid as part of total tax paid.
Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

What is Divisible Pool?

A divisible pool is a portion of Gross Tax Revenue (GTR) that is distributed between the Centre and the States.
It consists of all taxes, except surcharges and cess levied for specific purpose, net of collection charges.

Details:

There are 42 cesses that have been levied at various times since 1944 as listed in a report by the Vidhi Centre for Legal Policy in August 2018.
The very first cess was levied on matches, according to this study.
Post Independence, the cess taxes were linked initially to the development of a particular industry, including a salt cess and a tea cess in 1953.
Subsequently, the introduction of a cess was motivated by the aim of ensuring labour welfare.
Some cesses that exemplified this thrust were the iron ore mines labour welfare cess in 1961, the limestone and dolomite mines labour welfare cess of 1972 and the cine workers welfare cess introduced in 1981.

Types of Cesses

The introduction of the The Goods and Services tax (GST) in 2017 led to most cesses being done away with and as of August 2018, there were only seven cesses that continued to be levied.
These were:

The Finance Minister Nirmala Sitharaman introduced a new cess — a Health Cess of 5% on imported medical devices — in the Finance Bill for 2020-2021.

Vidhi Centre For Legal Policy

Vidhi Centre for Legal Policy is a not-for-profit company set up under Section 25 of the Companies Act, 1956 in 2013.
It is an independent think-tank that performs legal research to make better laws and improve governance for the public good.
The organisation has engagement with the Government of India, State governments and other public institutions to both inform policy-making and to effectively convert policy into law; and through strategic litigation petitioning courts on important law and policy issues.

Issues with the cesses:

The report by Vidhi Centre for Legal Policy, submitted to the 15th finance panel, points out that the share of cesses and surcharges (a ‘tax on tax’) in gross tax revenue (GTR) increased from 7% and 2%, respectively, in 2012-13 to 11.9% and 6.4%, respectively in 2018-19.
In one year alone, from 2017-18 to 2018-19, the collection from cesses increased to ?2.2 lakh crore (11.1% of GTR) to ?2.7 lakh crore, and surcharges from ?99,049 crore (5% of GTR) from ?1.4 lakh crore.
States have represented to the 15th Finance Commission that their share in gross tax revenues has fallen on account of the rising component of cesses and surcharges on which they have no rights as per the 80th Amendment to the Constitution, pertaining to Article 270.
According to the Comptroller and Auditor General of India (CAG), while 17 cesses and other levies were subsumed into the GST, 35 levies still remained in force.
The CAG report has also observed that for 2018-19, out of the ?2.7 lakh crore received from such levies, only ?1.64 lakh crore had been transferred to specific reserves and funds, the rest remaining with the Consolidated Fund of India.
The fund of ?1.25-lakh crore raised from the cess collected on crude oil has not been transferred to any oil industry development body, it was meant to finance.
The new 5% Health and Education Cess on income tax was partly deployed towards education, but no fund was created for health.

Way forward

The government should improve efficiency in tax collection, widen the tax base and reduce reliance on such levies.
According to Budget Estimates for 2018-19, cess collection is estimated to be 11.9% of gross tax revenue.
In light of evidence of diversion of funds from cesses, there must be greater transparency in cess imposition and collection.
Cesses must be periodically reviewed. A review will assess the amount actually collected vis-à-vis the amount utilised and compare each of these with the amount aimed to be collected.
Cesses garnering collections below Rs.50 crore in a financial year are economically inefficient, add to the multiplicity of taxes and fuel cascading effects.

Hence, going forward any economically inefficient cesses should be abolished.

Cesses shall be levied for a maximum term of 5 years which may be extended if the concerned ministry/department administering the levy is able to justify continuance and demonstrate satisfactory utilisation over the years.

Source: TH