👍👍States cessed out – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/states-cessed-out/article66451456.ece

Cesses and surcharges must be shared with States

Road and Infrastructure cess contributes to a significant chunk of the cess revenue | Photo Credit: MURALI KUMAR K

Cesses collected in early independent India were intended to aid the development of specific sectors. The different finance commissions from the Fourth Finance Commission disallowed the inclusion of cesses to the devolution pool as the purposes for the proceeds from these cesses were already legislated.

The Eightieth Amendment of the Constitution in 2000 legitimised the exclusion of cesses and surcharges from the devolution pool on the ground that these were levied for specific purposes legislated by Parliament.

A report to the Fifteenth Finance Commission by Vidhi Centre for Legal Policy shows that in 2012-13 proceeds from cesses formed 6.88 per cent of the total tax revenues, which increased to 11.8 per cent in the financial year 2018-19. Revenue earned through surcharges formed 2.83 per cent of the total tax revenue in 2010-11, which jumped to 6.4 per cent in 2018-19. While revenue from both cesses and surcharges was 10.4 per cent in 2011-12, it rose to almost 20 per cent in 2020-21.

Outside divisible pool

Recent years saw the introduction of education, health, highways and infrastructure as the ‘specific’ purposes for levying cess. The language used to levy cesses now is often general, and the purposes seem open-ended. For example, Road and Infrastructure Cess contributes to a significant chunk of the cess revenue, and the purpose of the cess is to aid the development of highways and other infrastructure in the country, which is not really a specific purpose.

This cess also ensures that a large share of the tax revenue collected by the Union on fuel stays with the Centre. The Health and Education Cess too faces the problem of specificity. The purposes mentioned are subjects of the State List, which has been seen as a move to undermine the powers of the States.

A CAG report on Centre’s finances tabled in Parliament in September 2020 observed that of the ₹2.75-lakh crore received from 35 cesses, levies and other charges in 2018-19, only ₹1.64 crore has been transferred to reserve funds and boards during the year and the rest retained in the Consolidated Fund of India.

The CAG has also found that the Centre still needs to create separate funds for the utilisation of proceeds in the health sector. It can thus be argued that cesses meant for distinct purposes are now used for general administrative responsibilities of the Union.

Historically, the Constituent Assembly had opined that surcharges would arise only on rare occasions and would not continue for long periods. Therefore, a time-bound collection of surcharges only as a last resort would keep up with the ethos of the Constitution and Indian federalism.

The increasing levels of cesses and surcharges have led to States demanding more share of revenue and the inclusion of cesses and surcharges into the devolution pool. Their demands are backed by the fact that the States bear the burden of more than 60 per cent of government expenditure. Their demands are not unreasonable.

To study the actual impact of the imposition of cesses and surcharges on State finances, it is possible to compute their impact on the fiscal deficits of each State if these sums are included, the devolution taking place according to the Finance Commission formula. The combined gross fiscal deficit of States in 2017-18 was ₹4,10,410.4 crore and 42 per cent of the total cesses and surcharges in the year amounted to ₹99,629.11 crore, which would cover 24.27 per cent of the combined GFD if distributed.

Smaller states, like those in the North-East, can cover their fiscal deficits many times over if they are allowed the share of cesses and surcharges. Larger States like Uttar Pradesh, West Bengal, Madhya Pradesh and Odisha can cover more than 20 per cent of their fiscal deficits. Other fiscally distressed States like Punjab, Kerala, and Haryana can cover around 10 per cent of the GFD.

The writer is a postgraduate in economics. This article is written as a part of the Smitu Kothari Fellowship of the Centre for Financial Accountability, Delhi

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