Starting Sunday, the imposition of a 0.5 per cent cess on all services on which service tax is levied, has got underway. The new Swachh Bharat cess, wherein the entire proceeds would remain with the Centre and not have to be compulsorily shared with the states, builds on a series of additional cesses and surcharges levied by the government in the Budget 2015-16.
States, however, increasingly appear to be uncomfortable with the Centre’s reliance on cesses as an instrument of incremental revenue generation as they feel it signals a way around the recommendations of the 14th Finance Commission’s to increase states’ share of tax revenues. Several state government representatives that The Indian Express contacted on the issue unambiguously expressed their reservation about the move, arguing that it signified the “inability of the Centre to manage funds and bring in fiscal reforms while resorting to the easiest way of raising funds”.
A senior official from Andhra Pradesh said that by levying the cess, the Centre has “tried to circumvent the recommendations of the 14th Finance Commission which suggested giving higher share of its net tax revenue”. “This is a tactical blunder by the Centre where in it has done away with several schemes by claiming that the states are getting much more under the Finance Commission’s recommendations. The cess only proves that the fiscal reforms are difficult to implement for the government. Ministries are hard-pressed for money and since the Centre is not able to give up enough money, it is forced to come up with cesses,” a senior official from Madhya Pradesh added.
States argued that since the divisible pool excludes levies classified as surcharges and cess for specific purpose, the development is a way to work around the increased share of states’ — 42 per cent of the centre’s net tax revenue in place of the earlier 32 per cent — as per the 14th Finance Commission recommendation.
Earlier, in the Budget for this fiscal, finance minister Arun Jaitley had announced an enabling provision to levy Swachh Bharat cess at a rate of 2 per cent or less on all or certain services if need arises. Also, the education cess and the secondary and higher education cess in central excise duty were subsumed and rounded off to 12.5 per cent as against 12.36 per cent. The clean energy cess was also hiked from Rs 100 to Rs 200 per metric tonne of coal to finance clean environment initiatives while the levy of wealth tax was proposed to be abolished with effect from assessment year 2016-17 and was replaced with an additional surcharge of 2 per cent on the super-rich with a taxable income of over Rs 1 crore. The Centre expects to collect Rs 6,000 crore from the clean cess, while the surcharge will translate into additional Rs 9,000 crore.
The Centre has been levying education cess and higher education cess for some time now. For the current fiscal, the government has budgeted nearly Rs 30,000 crore from the education cess and higher education cess while it expects Rs 50,000 crore from the road cess on petroleum. There is also a cess on other things, including clear energy and exports, with the total amount from various cess working out to Rs 1.16 lakh crore.
Though the Centre has been claiming that the enhanced share of states in the next tax revenue will allow them greater fiscal policy space, even at the cost of leaving less revenue for its own programmes and schemes, there are two clear counter-offensive measures that the Centre has resorted to — increasing the reliance on cesses and surcharges while simultaneously reducing the increase in fiscal space for states by cutting the total central assistance for state plans, which was reduced by over 25 per cent for the current fiscal.
Economists said that while states’ apprehensions may be exaggerated, there is a merit in their argument as the contours of the latest cess — the Swachh Bharat levy — are not clear. Pronab Sen, chairman, National Statistical Commission, said that while such cesses have been levied by earlier governments in the past too, “these are special purpose levies used for a defined purpose. It is not fungible. There are certain conditions in which cesses are desirable. When you need to assure people that funding for a particular project, say highways, will not dry up due to budgetary constraints, you bring in a cess. The idea behind levying Swachh Bharat cess is I think this. However, personally I don’t think Swachh Bharat cess falls in that category where people need assurance….”
Sen said that while states’ apprehensions may be unfounded as “cess doesn’t really take away from states”, the crucial issue is of disbursement of the funds collected. “That is not very clear now. In a sense what states are saying is right. Centre does not have the physical reach to implement a scheme like Swachh Bharat. Unless the states know the contours and pattern that will guide the scheme, they will remain insecure. There is logic in what they are saying,” he added.
A finance ministry official said that the deliberations are on with regard to finalising the contours of the cess. Currently, the ministry is considering making the ministries of water supply and sanitation and urban development the custodian of the cess who will then transfer it to states under different schemes. The government expects to collect Rs 3,700 crore this year from the Swachh Bharat levy while for the full year it expects to garner Rs 10,000 crore. The official said that the funds collected will go to the consolidated fund of India and the taxpayers will not get Cenvat credit for it.
The Budget 2015-16 has earmarked Rs 5.23 lakh crore, or 42 per cent of the divisible pool, as states’ share in total tax revenue. However, in its report, the Finance Commission pointed out that the share of cess and surcharges in gross tax revenue of the Central government has consistently increased from 7.53 per cent in 2000-01 to 13.14 per cent in 2013-14. This translated into the fact that less than 87 per cent of the Centre’s total tax revenue was available for the computation of the total devolution to the states.
Madan Sabnavis, chief economist, Care Ratings, said that “if the government puts surcharge or cesses to everything, we are creating inflationary pressures by increasing the cost. This is in a sense counter-productive. Problem with cesses is also that it becomes permanent in nature. These levies are back door entry instead of levying taxes.”
However, states can seek some relief in the fact that with the implementation of Goods and Services Tax (GST), cesses and surcharges, at least on the indirect tax side, would become a thing of past, and increase the divisible pool to their advantage. “This is therefore temporary in nature. The cesses and surcharges would be subsumed once the GST is rolled out. So both for tax payers and states, this is for the time being,” the finance ministry official quoted above said.