Rating the indirect tax regime: Over 30 cesses, surcharges to push GST rate on higher side

The subsuming of various cesses and surcharges into the GST rate may take it to a level much higher than 18%

Written by Sunny Verma | New Delhi | Updated: August 16, 2016 2:36 am
gst, gst bill, gst bill pass, what is gst, good and services tax, gst regime, non gst regime, non gst system, tax, tax burder, vat, cenvat, parliament, monsoon session, indian express Revenue mop up via cess and surcharge has become a significant component of the Centre’s tax kitty.

Subsuming a large number of cesses and surcharges into the Goods and Services Tax (GST) regime would potentially lead to a tax rate that is much higher than initially anticipated 18 per cent, especially considering that the Centre collected a substantive Rs 1.77 lakh crore of revenue by way of 33 different cesses and six surcharges in 2015-16. The National Democratic Alliance (NDA) government has built on the increasing tendency among Central governments to levy cesses, more so since proceeds do not have to be shared with the states. With Swachh Bharat cess being imposed last year and Krishi Kalyan cess kicking in from this financial year, revenue collection through cess and surcharge are expected to further swell this year. This is expected to spoil the initial estimation of a lower GST regime.

The NDA government gave mainly three reasons for rejecting Congress party’s demand for putting the 18 per cent GST rate cap in the Constitution — the rate was arrived at without incorporating the impact of all cesses and surcharges imposed by the Central government; it does not take into account compensation that the Centre will have to pay to the states; and the states’ demand for a revenue cushion in the form of a higher GST rate.

A committee chaired by finance ministry’s chief economic adviser Arvind Subramanian, in its report last December, suggested a revenue neutral rate of 15-15.5 per cent and standard rate (RNR) of 16.9-18.9 per cent for the proposed GST. An alternate standard rate of 18 per cent was also suggested. Since all cesses and surcharges were not included in the RNR arrived at by Subramanian-led panel and its report was pertaining to tax collections in the year 2013-14, the Centre thus implied that the GST rate ought to be higher than 18 per cent.

An analysis by The Indian Express shows that revenue collections through cess and surcharge has become a significant component of the Centre’s tax kitty over the years, accounting for more than 18 per cent of the total tax collection of Rs 9.47 lakh crore in last financial year. The Central government collected a total of Rs 1.77 lakh crore through cesses and surcharges in 2015-16, up from Rs 1.18 lakh crore in 2014-15 and Rs 1.05 lakh crore in 2013-14, as per the finance ministry data.

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The Union government received the highest amount through additional duty on excise on motor spirit and high speed diesel, popularly known as the road cess and used for development and maintenance of national highways/other roads and railway crossings. The government collected a total of Rs 73,000 crore through the road cess in 2015-16 (Rs 55,000 crore on high speed diesel and Rs 18000 crore on motor spirit).

In the Budget 2015-16, education cess and secondary & higher education cess leviable on goods and services were subsumed in the basic excise duty /service tax rate. The government collected total education cess of Rs 20,921 crore in 2015-16, up from Rs 19,793 crore in 2014-15.

Besides levying education cess and surcharge on income as well as corporation tax, the Centre collects cess on customs or central excise duties on goods such as motor spirit or petrol, high speed diesel oil, domestically produced crude oil, bidi, sugar, automobiles, coal, lignite, salt, rubber.

The Centre imposes cess as per powers given under Article 270 of the Constitution, while the power to levy a surcharge is contained in Article 271 by which Parliament may at any time increase specified duties or taxes by a surcharge for purposes of the Union government.

Clean environment cess is another significant component of the government’s tax kitty. The Centre had collected Rs 12,623 crore through this cess in 2015-16, up from Rs 5,393 crore in 2014-15. Since the levy was doubled to Rs 400 a tonne in this year’s Budget, the mop-up from this cess is expected to jump to Rs 23,944 crore in 2016-17.

The government also levies cess on crude oil for the development of the oil industry and collections from this category were Rs 14,962 crore in 2015-16, as compared to Rs 14,655 crore in 2014-15.

Cess is also levied on service tax collected from taxable services. The 0.5 per cent Swachh Bharat cess imposed in the last year’s Budget and 0.5 per cent Krishi Kalyan cess imposed in this year’s Budget fall in this category. The Swachh Bharat cess resulted in collection of Rs 3,750 crore in 2015-16.

The proposed GST Council, comprising of Union finance minister and all state finance ministers, will take a call on which all cesses and surcharges will be subsumed into the GST, revenue secretary Hasmukh Adhia told The Indian Express in an interview on

August 6. Finance ministry officials acknowledge that the Centre’s revenue requirements will be assessed higher, than suggested by 18 per cent standard rate, in case all cesses and surcharges were to be included in calculating such revenue neutral rate.

“All taxes on sale of commodities are now merged into GST. The GST Council will decide which item is to be placed in which slab. As per the Constitutional Amendment clause 12(4)(a), the GST Council shall make recommendation to the Union and the states on the cesses and surcharges levied by the Union, the States and local bodies which may be subsumed in the GST. Which all cesses will merge will depend upon the decision of the GST Council,” Adhia had said.

“If all cesses are merged in the GST, the requirements of revenue for Union government would have to be assessed higher, because the income coming from Union to GST instead of cess will now have to be devolved at the rate of 42 per cent to the states,” Adhia said. Sources said the Union finance ministry and states will now do a thorough calculation of total taxable revenue comprising cesses and surcharges to arrive at a fresh RNR.

Besides the cess, the Centre also imposes surcharge of 10-12 per cent on income tax collections from individuals whose total income is above Rs 1 crore in a year, while a surcharge ranging between 2 per cent and 12 per cent is imposed on companies with total income of more than Rs 1 crore. The government collected Rs 19,248 crore in 2015-16 as surcharge on income tax, up from Rs 15,645 crore in 2014-15 and Rs 13,746 crore in 2013-14. Surcharge on corporate income tax comprised the major chunk of Rs 17,754 crore, while the government collected Rs 1,494 crore through surcharge on personal income tax.

Since the government is intent to have a simpler indirect tax regime, encompassing as many central and state taxes, cesses and surcharges as possible, the GST rate is set to be on the higher side.

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