All you wanted to know about cess

Cesses seem to be emerging as the favourite form of taxation to fund the pet schemes of the government. After the Swacch Bharat cess, the recent Budget introduced two new cesses — the Krishi Kalyan Cess and the Infrastructure Cess, while the Clean Environment Cess was doubled. But to ward off criticism, 13 cesses, each yielding less than ₹50 crore a year, were abolished too.

A cess is a tax that is levied by the government to raise funds for a specific purpose. Collections from the Education Cess and the Secondary and Higher Education Cess, for instance, are supposed to be used for funding primary and higher and secondary education respectively. Likewise, money collected from the newly introduced Krishi Kalyan Cess is to be used for funding agri development initiatives.

A cess is also different from the usual taxes such as personal income tax, excise duty and customs duty in another respect. All the taxes collected by the government usually go into the Consolidated Fund of India (CFI) which can be spent on any legitimate activity. But the collections from a cess are required to be kept outside of the CFI to be spent only on the specific purpose for which it was levied.

If there is an unspent amount, it is simply carried forward for use in the following year. While the Centre has to mandatorily share the revenue from other taxes with the States, it gets to retain the entire kitty with a cess.

Cesses are not supposed to be relied upon as a regular source of revenue. They are resorted to only for a particular purpose and are to be discontinued after the objective is met, though this often doesn’t happen in practise. Cesses can be computed in different ways. The Swachh Bharat Cess (0.5 per cent) and the Krishi Kalyan Cess (0.5 per cent) both apply on taxable services. They are simply added to the 14 per cent service tax rate, taking the final rate to 15 per cent. The Clean Environment Cess is applied at a flat rate of ₹400 on every tonne of coal.

The Education Cess on the other hand is computed as a tax on a tax. An individual with taxable income of ₹20 lakh and tax liability of ₹6 lakh, will pay education cess at 2 per cent of his tax (₹12,000).

Governments love to rely on cesses because they are an easy way to raise tax revenue. Unlike taxes, cesses can be introduced, modified and removed any time without much trouble. As long as the government has a specific reason for imposing a cess, all that it has to do is to put out a notification to this effect. However, even a small modification in a tax rate has to be followed by accompanying amendments in the tax rules and regulations.

Just like taxes, cesses too peg up the cost of living for people like you and me. So, from an individual’s perspective, a cess is as bad as any tax. The recently introduced Infrastructure Cess (1-4 per cent) on motor vehicles has already led some car companies to announce price hikes, as they pass on the additional burden to their customers. Similarly, with the doubling of the Clean Environment Cess (from ₹200 to ₹400), electricity tariffs are expected to go up by 4-6 paise a unit. The 0.5 per cent Krishi Kalyan Cess means that for every ₹100 worth of taxable services, you will be charged 50 paise as cess.

Will cesses never cease? Well, if you live in a country like India, where there are so few tax payers, don’t bet on it.

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