What are cess and surcharge?

• A cess is a tax that is levied by the government to raise funds for a specific purpose. Collections from the Education Cess and Secondary and Higher Education Cess, for instance, are supposed to be used for funding primary and higher and secondary education respectively.
• Surcharge is an additional charge or tax. For example: A surcharge of 10% on a tax rate of 30% effectively raises the combined tax burden to 33%.
• The main difference between surcharge and cess is that surcharge can be spent like any other taxes, the cess should be spent only for a specific purpose for which it is created.
• The Union government does not have to share cesses and surcharges with the states as they are not part of the divisible pool that needs to be shared with states.

Source from constitution

• Article 270 of the Constitution requires the Union government to distribute the proceeds from all Central taxes listed in the Union List based on the recommendation of the Finance Commission. 
• However, Article 271 excludes the distribution of the revenue from any surcharge or cess levied by the Union government for any specified purpose.

Where does the cess money go?

• Cesses are earmarked taxes and the proceeds should be used for the purposes for which they are levied. 
• A number of reserve funds or development boards have been created for these specified purposes and the collections from the cesses are supposed to be transferred to these funds placed in public accounts for defraying expenditures on the specified purposes. 
• They are not a part of the CFI and cannot be used for defraying regular expenses. 
• The transactions in public accounts are supposed to be done by the government as a trustee or a banker, and are not subject to vote by Parliament.

Why in the news?

• The Financial Audit Report of the Government of India by the Comptroller and Auditor General (C&AG) for 2018-19 placed in Parliament recently has pointed out that in 2018-19, the collections from 35 Cesses amounted to nearly ₹2.75-lakh crore of which only ₹1.64-lakh crore was transferred to various reserve funds and boards designated for the purpose in Public Accounts.

Impact of short transfer to Public account of India

• In addition to off budget borrowings, short transfer of cess revenue to public accounts is a method used to obfuscate the Budget to show lower revenue and fiscal deficits.

Should the government of India raise revenues through so many cesses? 

• The cesses and surcharges constituted just about 3% of Central gross tax revenue in 2000-01; but in 2015-16, it was 16.5% and it could be as much as 20% in 2020-21.
• Cesses are earmarked taxes and to ensure a minimum allocation to important and priority programmes, this method of financing could be used. 
• Large numbers of cesses make it difficult to see all of them as priority areas requiring protection of funding which may result in the possibility of limiting the funding of important and priority areas to the amount of cess collected even when they require much larger amounts. 
• Too many cesses also complicate the tax system and add to administrative and compliance costs. 
• The operation of the cesses involving collections and transfer to designated funds in the Public Accounts makes the entire process opaque as the operation of these funds too needs to be monitored and audited.

Conclusion

The issues raised by the C&AG relate merely to short transfer of funds, but the implications are much larger which should be considered by the government and make necessary arrangements to credit the short transfer of money to the Public Account of India and also not to deny states its share of taxes in the divisible pool.

Reference:

1. https://www.thehindu.com/opinion/lead/flagging-cess-non-transfer-its-economic-impact/article32754864.ece