Why States Resent the Cess-Surcharge Economy

A significant—but unhealthy—fiscal policy trend in recent years is the tendency of the government to rely on cesses and surcharges to raise resources. This has added to the fund crunch faced by various state governments and made for over-centralisation of resources and expenditure patterns.

Article 270 of the Constitution allows the central government to retain any cess for a specific purpose. However, cesses and surcharges, that were supposed to be a limited, short-term measure to meet particular needs, have become a permanent feature. The feature of cesses is that this revenue does not become part of the divisible pool (the tax resources that get shared with states).

According to CAG’s audit of Union government finances, in 2017-18, the Centre collected Rs. 2,14,050 crore through no less than 42 cesses, which represented 11.8% of government revenue, which it did not have to share with the states. This implies that the share of the resources going into the states’ kitty is reduced. Meanwhile, the Centre’s share of resources keeps growing. A majority of states feel that cesses and surcharges should either be done away with or included in the divisible pool.

To clarify, the special GST cess introduced with the specific purpose of making up the GST shortfall to states is excluded from this analysis. Leaving that element aside, cesses and surcharges that are not part of the divisible pool of resources are now around a fifth of the central taxes. This is a very high share. It is the state that is responsible for the positive or negative fallout of any economic activity within its domain. The unfair aspect of a cess is that the Centre would get the resources even though the State has to deal with the impact of an activity.

According to the Budget Estimate (BE) for 2022-23, a 19.4% of the central tax collection was not in the divisible pool. This share was far lower in terms of actuals, at 9.3% in 2014-15 and 9.8% in 2019-20, which shows how rapidly this figure has risen lately. In 2021-22 it peaked at 22.6% in the Revised Estimates (RE).

Following the recommendations of the Fourteenth Finance Commission, in Financial Year 2015-16, the share of central taxes to be shared with states was increased. At the same time, allocations for important social sector schemes were cut substantially on the ground that state governments will be able to make up the shortfalls through the additional resources allocated to them. However, question marks remain on whether the hikes in state resources were adequate to take up their growing responsibilities. There are also questions whether the central government cut its allocations hurriedly, without giving states time to make adjustments. The Goods and Services Tax regime further limited the choices with state governments, making the fund crunch quite acute in several.

This is why the growing proportion of cesses and surcharges in central tax collections is worrying. Resources collected as cesses or surcharges are meant only for the Union government. The higher the share contributed in this way, the lower the component available for state governments. This explains why the share of resources transferred to states has not grown to the expected extent.

Relatively new cesses include the Special Additional Duty of Excise on motor spirit, the road and infrastructure cess, the agriculture infrastructure, the development cess, and some others (which may come and go). These and earlier cesses and surcharges aimed at the healthcare sector, education sector, and so on have moved beyond special and temporary requirements to become not just broader but more permanent and also arbitrary.

Just because the Centre can impose cesses, it cannot neglect the responsibility to raise budgetary resources. In the Budget Estimate for 2021-22, Rs. 54,874 crore was provided for school education. Of this, the government planned to raise Rs. 44,000 crore from the education cess. Such heavy dependence on cesses for essential roles of the state is avoidable.

Many questions have been raised about the utilisation of cesses. A Comptroller and Auditor General (CAG) report placed before Parliament in December 2017 said very significant amounts were raised through cesses but not utilised for the stated purpose, which defeated the rationale that a high priority need exists that required a special cess.

From 2006-07 to 2016-17, Rs. the Centre raised 83,497 crores through the Secondary and Higher Education Cess. The CAG report said, “...neither were the schemes identified on which the cess proceeds were to be spent nor was the designated fund created to deposit the proceeds of the cess.” Even in the 2017-18 audit, CAG notes that the proceeds (by then over Rs. 94,000 crore) was being stored in the Consolidated Fund of India but not being transferred to the concerned fund, “contrary to procedure”.

The Research and Development cess has been levied on imported technology. Its proceeds are meant to go into developing indigenous technology. The CAG report said that during the two decades from 1996-97 to 2016-17, the Union government raised Rs. 7,885 crore through this cess but only disbursed Rs. 609 crore to the Technology Development Board. The remaining Rs. 7,226 crore, or about 90% of the cess, was not utilised.

Even a highly-publicised scheme as the Swachh Bharat Mission has this problem. A significant part of the cess collected in its name has not been used to improve urban sanitation. Rs. 16,401 crore were collected in two years (2015-16 to 2016-17) by the Swachh Bharat cess. Of this, Rs. 4,001 crore was not utilised, amounting to about 25%. Naturally, the Centre deprived the potential beneficiaries of improved urban sanitation by failing to utilise this money.

A different type of cess exists, raised from specific sectoral activities, such as construction, ports, cinemas, etc. These are meant for the welfare of workers in the concerned sector. While “codifying” the labour laws, some of these cesses were abolished while the fate of others became uncertain or complicated. The Centre must sort this problem out to avoid continuing injustice to workers.

To sum up, there is substantial underutilisation in important cesses, even the Central Road Fund cess and the Clean Energy cess. The government must check diversion, non-use and misuse, but the most crucial aspect is the ever-smaller share of the overall budgetary pie that the states are getting even though they are the unit closest to the people.

The writer is honorary convener, Campaign to Save Earth Now. The views are personal.