Prime minister Narendra Modi, who campaigned for cooperative federalism which means giving the states their fair share, has done well to accept the recommendations of the Finance Commission that raised the share of central taxes that are to be devolved to states. At the same time, however, his government has greatly enhanced the powers of what can rightly be called the Indian Cess Service which denies states their fair share of revenues. While cesses and surcharges help increase central revenues and are good in the sense that the money collected cannot be used for any other purpose, under the constitutional scheme, these do not need to be shared with states.
Over the past few months, the government has imposed three cesses, the Swachh Bharat cess in November and the Krishi Kalyan cess on all taxable services and the infrastructure cess. The Krishi cess will raise Rs 5,000 crore in the 10 months of FY17 and, in effect, raises the service tax rate to 15%. While the Swachh Bharat cess is expected to raise Rs 10,000 crore in FY17, the infrastructure cess will raise Rs 3,000 crore. Finally, he doubled the cess on coal, lignite and peat —Clean Environment Cess—from Rs 200 to Rs 400 per tonne.
The share of revenues from cess and surcharge has risen from just 7.22% of the total tax collections in FY13 to 12.94% in FY16 and is projected to be 13.8% in FY17. Apart from the fact that cesses are not shared with states, once one is imposed, it rarely gets withdrawn—the Beedi Workers cess (1976) and the Cine Workers cess (1981) are classic examples. In this Budget, Jaitley did withdraw 13 cesses that each earn the government just Rs 50 crore. But since the overall share of cesses has gone up, this was aimed more at cleaning up the statute instead of giving states their fair share. If the concern is to ring-fence expenditure, one possible solution is to move an amendment that shares cesses and surcharges with states.