The Centre’s imposition of a 0.5 per cent Swachh Bharat cess on all services is both ill-conceived and badly timed. The timing is bad because the Narendra Modi government is currently trying to build a political consensus and bring states on board for ushering in a nationwide goods and service tax (GST). The GST is essentially a comprehensive value-added tax that subsumes all Central, state and local taxes, including octroi and entry tax, while allowing firms/ dealers at every point of the supply chain to claim credit against taxes paid on their inputs. The new cess, effective from November 15, is a standalone levy that takes the overall service tax rate to 14.5 per cent. Moreover, there is no input credit available on this cess, which goes against the very principle of the GST and thereby weakens the Centre’s case for pushing through the country’s most ambitious and desirable indirect tax reform. Also, the fact that the proceeds of the Swachh Bharat cess — amounting to Rs 10,000 crore for a full financial year — aren’t shareable with the states gives them further reason to stall the original plan of implementing the GST from April 2016.
But, timing apart, there is also the issue of the desirability of the latest cess. A cess is meant to be imposed for a clearly defined purpose. A celebrated example of this was the cess on diesel levied by the previous NDA government under Atal Bihari Vajpayee in 1999, the proceeds of which were earmarked specifically for the national highways development programme. That cess basically helped ring-fence this important national project, by ensuring adequate funding that was not held hostage to budgetary mismanagement. The Swachh Bharat Abhiyan, while being a Central government mission, does not really meet the test of a focused project whose contours have been clearly defined. Even if that is done, the initiatives under it cannot be from the top. Provision of clean water, drainage facilities or building of toilets ultimately demand local-level solutions, more amenable to implementation by state governments and local bodies. Swachh Bharat, to that extent, is a vague pretext for a cess, unlike the ones for national highways or high-speed rail corridors, which can be more effectively implemented at the Central level.
The new cess also goes against the idea of fiscal federalism. The Modi government can claim full credit for increasing the states’ share in Central tax collections to 42 per cent, up from 32 per cent earlier. But since cesses and surcharges are excluded from the divisible pool, states have every reason to be suspicious of the sudden move to impose a levy that has taken even industry by surprise. And the economy can do without such surprises.