Cess is a special kind of tax, the proceeds of which have to be used towards a specific cause. In Budget 2020-21, Finance Minister Nirmala Sitharaman announced the levy of health cess, which is proposed to be levied on medical equipment imported into India and charged at 5 per cent over and above the customs duties chargeable on such equipment. The proceeds from the cess are proposed to be used for financing the country’s health infrastructure and services.

Every cess has two important parts — the tax base and the earmarked purpose. While the tax base — that is, customs duty — is within the legislative power of the Union Government , ‘public health, hospital and dispensaries’ fall within the legislative ambit of State governments.

Therefore, the earmarked purpose for which the health cess is sought to be levied is within the realm of State governments’ legislative power and the fulfilment of such purpose is their responsibility. It may not be a good policy to levy cess for a purpose which is not the responsibility of the Union Government.

Further, since cesses are earmarked for specific purposes, they do not form a part of the divisible pool and are hence not shared with the State governments. In the past, States have recorded grievances before the Finance Commission over the increasing share of cesses in total taxes, as this deprives them of a fair share in their revenue. It has also been recommended by previous Finance Commissions that the Centre should review the imposition of cesses and reduce their share in the gross tax revenue.

Limited period

Further, the Sarkaria Commission had also suggested that cesses must be confined only for a limited period and for a specific purpose. The purpose for which health cess is levied is already entrusted to the government in its discharge of general administration. To ensure that the imposition of such does not continue forever, it may be considered to add a sunset clause for which this cess may be levied.

The imposition of cess has been a prevalent practice since Independence, however the purpose for which it is imposed has, over the years, became increasingly vague and general.

For instance, previously cesses such as Cine Workers Welfare Cess and Iron Ore Mine Labour Welfare Cess were levied specifically to promote the welfare of cine workers and mine workers, respectively. However, gradually the purpose became vague — the Krishi Kalyan and Swachh Bharat cesses are cases in point.

The current health cess also has a broad head of expenditure rather than a specific purpose. It is advisable that the purpose for which cess is levied should be specific so that the proceeds are used only for that specific purpose.

Utilisation of proceeds

Lastly, the appropriation and utilisation of the proceeds from health cess are left to the discretion of the Union Government. Previously, there have been many discrepancies reported by Comptroller and Auditor General of India pertaining to administration and utilisation of the proceeds from cesses. In many instances, it has been noted that the proceeds have either been under-utilised or mis-utilised.

This is because of the lack of an effective mechanism to match collections with actual monies needed for the identified purpose.

It is advisable that a policy document be issued that clearly spells out the amount that the Union Government aims to collect via the health cess. Further, a periodical review may be conducted on the amount actually collected and utilised to ensure a transparent and effective mechanism for the levy.

Though it is understood that the easiest way to raise tax revenue is by the introduction of a new cess, it should not become a general revenue-raising mechanism. It should only be levied when the need for imposition of such cess is justified.

The legislation levying such cess may also envisage a transparent mechanism for collection and maintenance of the proceeds and a periodical review of such mechanism may also be put in place to ensure that the proceeds are not mis-utilised.

The writer is a Research Fellow in the Tax Law vertical at Vidhi Centre for Legal Policy. The views are personal

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