Abolish cess, surcharge

Governments of different political dispensations have leaned on surcharges and cesses to make up for the shortfall in their revenues from regular taxes. In the process, the Centre has converted what was meant to be a short term revenue mobilisation measure into a regular feature for income-tax payers, both individuals and businesses. That practice needs to be brought to an end for two reasons. One, it is unfair to those who pay taxes compared to those who wilfully do not, and two, it also unfair to the States, as the Centre does not share taxes collected as surcharges and cesses with the States. The Fourteenth Finance Commission attempted to bring some balance in the revenue share of the Centre and the States, by increasing share of the States in the divisible pool of tax resources to 42 per cent from 32 per cent in its recommendation for 2015-16 to 2020-21, but faced with revenue shortfalls, the Centre has increased the quantum of cess and surcharge over the past few years. The three per cent education cess paid by individuals and businesses has risen to a four per cent education and health cess. The 10 per cent surcharge that P Chidambaram introduced in the 2013-14 Budget on taxable incomes of individuals, firms and association of individuals that exceed ₹1 crore too has risen — they now pay 15 per cent surcharge. That apart, those with taxable income of between ₹50 lakh and ₹1 crore have to pay the 10 per cent surcharge. The surcharge on incomes of companies too has risen.

Budget documents show that the total surcharges and cess that companies were expected to pay in financial year 2018-19 was estimated at ₹93,249 crore while the basic tax on their income was estimated to be 5,27,750 crore. Thus, the cess and surcharge was estimated at 15 per cent of all taxes on income paid by companies, with a bulk of it coming from surcharges. Likewise, for individuals, the income tax to be collected for the same year was estimated ₹4,61,182 crore and an additional ₹23,618 crore as cess and surcharge — with the cess and surcharge amounting to about five per cent of the taxes paid by individuals. In 2012-13, the surcharge and cess together was about five per cent of all the income tax paid by companies and three per cent of the income tax paid by individuals.

While GST has done away with most indirect tax cesses, they persist on the direct taxes side. The Union government needs to find better ways to improve its tax collections. Consider for instance, that just a little over 81,300 individuals declared gross income of more than ₹1 crore for assessment year 2017-18 (or financial year 2016-17). The tax department can improve outcomes without resorting to draconian steps. The upcoming first Budget of the second Modi government offers a chance to send a powerful reforms signal by doing away with such cesses and surcharges.

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