The share of cess and surcharges as a percentage of tax revenues has increased over the years for the Centre. In Budget 2016-17, these collections totalled ₹1,48,031 crore, accounting for 9.1 per cent of overall tax revenues.
In 2014-15, the collections were just half of that amount, and accounted for 6.1 per cent of tax revenue.
In the past, many States have argued against the levy of cess and surcharge — these revenue sources do not form part of the devolution to States. According to the Constitution, cess and surcharges do not form part of the divisible pool, and should be used for specific purposes.
The Fourteenth Finance Commission took a bold step, recommending a higher share of 42 per cent of the divisible pool to be given to States from the earlier 32 per cent.
It was essentially to compensate the States while doing away with the need to amend the Constitution — a long-drawn out legislative process.
While the Modi government accepted the recommendations of the Commission, it now seems to be not following it in the true spirit.
The levy of multiple cess and surcharges gives the Centre higher funds that it does not have to share with the States.
In effect, such levy brings back the issue of vertical fiscal imbalance — a situation where revenues do not match expenditures for different levels of government. While the Centre gets the larger share of revenues, the States make the bulk of the disbursements.
“Fundamentally, I am against the concept of cess and surcharges — which could aggravate the issue of vertical imbalance,” said Abheek Barua, Chief Economist at HDFC Bank. Moreover, it brings opacity into the tax process, he added.
In the latest Budget, the Centre introduced two new cesses — infrastructure cess and Krishi Kalyan cess.
About 35 per cent of the total collections via cess and surcharges is budgeted to be mopped up as corporate surcharge, while the clean environment cess, Swachh Bharat cess and Krishi Kalyan cess would constitute another 18 per cent, 7 per cent and 4 per cent approximately. Other cess and surcharges make up the rest.
The States, over the years, have been arguing against cess, with some suggesting that cess that exists for more than three years be regularised to become part of the divisible pool.
That gives some food for thought for the Fifteenth Finance Commission.