Goods and Services Tax (GST)

States ask Centre to curb its ‘Cess’ habit

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cess, Surcharge

Mains level : Not Much

cess

Several States, including some governed by the Centre urged to rein in its reliance on raising revenues through cesses and surcharges which reduce their share in the divisible pool of taxes.

What are Cesses and Surcharges?

The Union government has the authority to collect money through a variety of levies referred to as a tax, fee, cess, and surcharge.

(A) Cess

  • Cess is charged on the tax amount and is levied for a specific purpose.
  • In India, cess is applicable to all the taxpayers, and it is calculated over, and above the base tax liability of the taxpayer, cess taxes initially go to the consolidated fund of India (CFI) that has to be used for the purpose for which it was collected.
  • Education Cess, Swachh Bharat Cess

(B) Surcharge

  • The surcharge is levied on the tax payable and not on the total income.
  • It directly goes to the CFI, and after that it can be used for any purpose, just like the normal tax.
  • Surcharge applies to the taxpayer whose income is more than Rs 50 lakh.
  • In simple terms, surcharge is a tax on tax that is not collected for any particular cause, and the union government may use the proceeds of surcharges for any purpose it sees as important.
  • The objective behind the surcharge is to put a high tax burden on people with high incomes.

Difference between the two

  • The rate of cess under income tax is fixed at 4%, whereas the rate of surcharges varies from 10%, 15%, 25% & 37% based on the taxpayers’ total income.
  • Cess is calculated on total tax and surcharge amount; surcharge is calculated on total tax amount only.
  • In a nutshell, while both are taxes, cess is collected from every taxpayer to meet a certain purpose, and the surcharge is an additional tax collected from the taxpayers who have higher slab income.

Key difference over which states dispute

  • Major difference is that each can be shared with the state government, the surcharge can be kept with CFI, and it can be utilised for other taxes.
  • However, cess should be utilised for a particular reason. This restricts the states expenditure.
  • Tamil Nadu noted that the share of cesses and surcharges had grown from 10.4% of gross tax revenue in 2011-12 to 26.7% in 2021-22.
  • This has deprived the States of their legitimate share of revenue collected by the Union Government.

 

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