Cess mess

The government is proposing another cess. This time to meet the CMP promises to increase spending on health. The cess would be imposed on tobacco and alcohol. It will mop up Rs 3,000 crore which will be spent on health. The ‘sin tax’ will not be unpopular. It will be like the education cess which people were willing to pay because they think it is for a good cause. But the cess raises uncomfortable questions: if the government is going to collect cesses for education and health, what is it normally collecting taxes for? Are tax collections merely funds garnered for the government to spend either on itself or on things that are not to be accounted for? Is it that whenever money has to be spent for the provision of public goods, it will be paid out of a cess earmarked as spending for a specified use?

The trend towards cesses is bad public finance. Already there is a cess for highways, for rural telephony, for education, for the rubber board. A cess distorts choice of inputs and technology. Unfortunately, distortionary taxes, like cesses, stamp duties and octroi or taxes that are easy to collect like the STT, have come to characterise the Indian tax system. A tax and spend structure based on earmarked taxes reduces the operational flexibility of the government. It reduces the ability to do macroeconomic management. Cesses are cascading taxes. They remain out of the purview of the Centre-state devolution of taxes and accrue only to the former. In a federal structure this should not be acceptable to states.

In complete contrast to the proposal for the cess, is the proposal for a tax on all goods and services (GST) based on the Value Added Tax principle. This tax would raise resources for the Centre and states. With the high demand for public expenditure arising out from the commitment to NCMP, Chidambaram would do well to get out of the present myopic and ad hoc way of thinking about government revenue. Instead of additional taxes on the manufacturing sector, he should implement the GST. When most countries of the world have moved towards a VAT, when neighbours like China, Bangladesh, Sri Lanka and Pakistan have adopted GST. So why is India dragging its feet?