Tax Reforms

Where are the funds collected through cess parked?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Cess, Office of the CAG

Mains level : Cess deposits

The Comptroller and Auditor General (CAG) of India, in its latest audit report of government accounts, has observed that the government withheld in the Consolidated Fund of India (CFI) more than ₹1.1 lakh crore out of the almost ₹2.75 lakh crore collected through various cesses in 2018-19.

Try this PYQ:

Q.Consider the following items:

  1. Cereal grains hulled
  2. Chicken eggs cooked
  3. Fish processed and canned
  4. Newspapers containing advertising material

Which of the above items is/are exempted under GST (Goods and Services Tax)? (CSP 2018)

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 4 only

(d) 1, 2, 3 and 4

Issues with the cess deposits

  • The CAG found this objectionable since cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
  • The nation’s highest auditor also found that over ₹1.24 lakh crore collected as Cess on Crude Oil over the last decade had not been transferred to the designated Reserve Fund — the Oil Industry Development Board.
  • Similarly, the Goods and Services Tax (GST) Compensation Cess was also “short-credited” to the relevant reserve fund.

What is Cess?

  • The Union government is empowered to raise revenue through a gamut of levies, including taxes (both direct and indirect), surcharges, fees and cess.
  • While direct taxes, including income tax, and indirect taxes such as GST are taxes where the revenue received can be spent by the government for any public purpose in any manner it deems appropriate for the nation’s good, a cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
  • Every cess is collected after Parliament has authorised its creation through enabling legislation that specifies the purpose for which the funds are being raised.
  • Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.

How many cesses does government levy?

  • A report submitted to the Fifteenth Finance Commission listed 42 cesses that have been levied at various points in time since 1944.
  • The very first cess was levied on matches, according to this report.
  • Post Independence, the cess taxes were linked initially to the development of a particular industry, including a salt cess and a tea cess in 1953.
  • Subsequently, the introduction of cess was motivated by the aim of ensuring labour welfare.
  • Some cesses that exemplified this thrust were the iron ore mines labour welfare cess in 1961, the limestone and dolomite mines labour welfare cess of 1972 and the cine workers welfare cess introduced in 1981.

Cesses after GST

  • The introduction of the GST in 2017 led to most cesses being done away with and as of August 2018, there were only seven cesses that continued to be levied.
  • These were Cess on Exports, Cess on Crude Oil, Health and Education Cess, Road and Infrastructure Cess, Building and Other Construction Workers Welfare Cess, National Calamity Contingent Duty on Tobacco and Tobacco Products and the GST Compensation Cess.
  • And in February, Finance Minister Nirmala Sitharaman introduced a new cess — a Health Cess of 5% on imported medical devices — in the Finance Bill for 2020-2021.

Why is the issue in the news currently?

  • For one, most crucially, the express purpose of this particular cess is to help recompense States for the loss of revenue on account of their having joined the GST regime by voluntarily giving up almost all the power to levy local indirect taxes on goods and services.
  • Also, the share of revenue to the Centre’s annual tax kitty from cess had risen to 11.88% of the estimated gross tax receipts in 2018-19, from 6.88% in 2012-13.
  • Given that cess does not need to be a part of the divisible pool of resources, this increasing share of cess in the Union government’s tax receipts has a direct impact on fiscal devolution.

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