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View | The question of cess

View | The question of cess
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By Najib Shah  Oct 16, 2022 11:34:17 AM IST (Published)

By way of background, it may be mentioned that Article 270 of the Constitution enables the Union Government to levy and retain any cess levied for a specific purpose. Article 271 empowers Parliament to levy a surcharge on any taxes which fall within the Union Government's taxing powers. 

North Block would be humming with activity; preparatory work for the Union Budget due on February 1 would have commenced. The initial work involves ascertaining from all the Ministries how much of the money allotted in the previous budgetary outlay has been spent. The Ministries will also be expected to intimate their likely expenditure in the next few months. This is essential to ensure that money which cannot be spent is surrendered well in time so that it can be allotted to other Ministries. 

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All Ministries will be expected to project their requirements for the coming fiscal. This will set in motion the exercise to ascertain how much revenue will be generated assuming all other things are the same. Assumptions of growth are inbuilt into this exercise. Then comes the most vexatious part-how to bridge the gap between projected expenditure and projected revenue. Should taxes be increased and on which items-multiple considerations come into play? Revenue collected from cesses has begun to play an important role in the scheme of things. 
By way of background, it may be mentioned that Article 270 of the Constitution enables the Union Government to levy and retain any cess levied for a specific purpose. Article 271 empowers Parliament to levy a surcharge on any taxes which fall within the Union Government's taxing powers. 
As the Fifteenth Finance Commission (FFC XV) has observed the underlying spirit for levying a cess is to serve a specific purpose and provide necessary financial impetus to a particular sector/area of the economy. Hence, the Union Government merely acts as a custodian of funds so collected in the Public Account till these are appropriated for the mandated purpose. Similarly, surcharges are meant to be levied only for short periods. Both cesses and surcharges are excluded from the divisible pool.
The introduction of the Goods & Services Tax (GST) in 2017 had the inbuilt premise that all taxes including cesses are subsumed in the new levy. However, in the very next year, the Union Budget of 2018-19 saw the concept of Road Cess being enlarged and rechristened as Road and Infrastructure Cess and the introduction of a Social Welfare Surcharge. This was apart from the GST Compensation cess to bridge the gap between the GST collection and the revenue which the States ought to be getting assuming a 14 percent growth.
The FFC XV states that cesses and surcharges have grown dramatically as a percentage of the gross revenue. Thus, in respect of both Direct and Indirect Taxes from they have grown from 10.4 percent in 2011-12 to 19.9 percent in 2018-19 with a projected RE of 20.2 percent in 2019-20. This is money to repeat which does not get shared with the States.
The Receipt Budget documents of 2022-23 show that the collection of cesses in respect of cesses administered by the Department of Revenue is Rs 1,34,492.40 crores in 2020-21. The amount budgeted for 2021-22 was Rs.2,07,900 crore -the revised amount for 2021-22 being Rs. 2,69, 655 crores. This is apart from revenue from cesses administered by other departments-ranging from rubber, jute, tea, oil & Oil seeds, cotton, tobacco, and paper. The total amount of revenue collected from these cesses is Rs 0.33 crore.
Cesses are collected as a duty of excise and customs. The Central Road and Infrastructure Fund Act for instance authorises the collection of the ‘cess as a duty in the nature of the duty of excise and customs. As the Department Related Parliamentary Standing Committee on Transport, Tourism and Culture mentioned in its Three Hundred and Twelfth February 2022 report which reviewed the Central Road and Infrastructure Fund Works, there is no fixed share of apportionment as of now. The Fund is administered by the Department of Economic Affairs. A committee headed by the finance minister determines the distribution of the cess so collected. The Report is silent as to how much has been collected and how much allotted. 
On the direct taxes side, the last Budget saw the finance minister clarifying that health and education cess cannot be treated as expenditure-this was a clarification which was to take effect retrospectively. This put an end to the confusion about whether to treat cess as a tax or as a tax deduction which in effect lowers tax liability.
While revenue, both Direct and Indirect, have done well the fact remains that Government has also committed itself to huge Capex towards infrastructure. The fact also remains that the CAD is mounting as is inflation. So, it is going to be very tempting to continue with the levy of cesses. Hopefully, the government should not increase the quantum of cess and more importantly introduce new cesses as a revenue-garnering measure.
It must be mentioned that the finance minister in August 2022 in response to a Parliament Question on what the government was doing with the collected cess, stated that more than what has been collected as cess has been spent. This should put at rest the nagging fear whether the amounts collected as cess are indeed being used for the purpose for which they have been collected.
— Najib Shah is a former chairman of the Central Board of Indirect Taxes & Customs. The views expressed in this article are his own.
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