While finance minister Nirmala Sitharaman said in Parliament on Wednesday that the Centre spends much more than what it gets through cesses and surcharges, a new report of the Comptroller and Auditor General of India has raised concerns over utilisation of the proceeds of these imposts.
“Scrutiny of cess and levies during 2020-21 revealed cases of short or non-transfer of collected amounts,” the CAG said in the Financial Audit of the Accounts of Union Government, tabled in Parliament.
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Amid criticism by the Opposition that the Centre has been using the cess route to corner a large chunk of funds, thus depriving states of their legitimate revenue share, Sitharaman cited the instance of 2021-22, when the collection of the road and infrastructure cess stood at Rs 1,95,987 crore, while the amount utilised was as much as Rs 2,51,738 crore. Similarly, she said, the health and education cess stood at Rs 52,732 crore last fiscal, while the amount utilised was Rs 78,287 crore.
The CAG, however, said that audit scrutiny revealed short transfers of proceeds of cesses, including the Universal Access Levy and National Mineral Trust Levy as well as the non-operationalisation of Madhyamik and Uchchatar Shiksha Kosh (MUSK), which is funded through the health and education cess. “Audit noticed that while the creation of MUSK was approved by Cabinet in July 2017, it has not been operationalised due to non-finalisation of its accounting procedure,” the report noted.
In fact, the Centre’s aggressive use of the cess route — especially those on auto fuels — to bolster its own tax revenue had, in the 14th Finance Commission period, decelerated the growth of the divisible tax pool, thereby adversely impacting the states’ revenues. Though trend was there throughout the 14th Finance Commission award period (FY16-FY20), it was most visible in FY20, with tax transfers declining, unconventionally. In FY20, tax transfers to states were down 15% on year. It may be noted that the 14th FC’s award was one of the most generous to states, with the transfers to them from divisible pool of tax revenues increasing by 10 percentage points to 42%. The 15th FC largely retained the sharing formula. Cesses and surcharges, are not part of the divisible tax pool that is shared with states.
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The government had on Tuesday informed Parliament that cess and surcharges accounted for 28.1% of gross tax revenue in FY22, against 18.2% in FY20. Of course, this includes the GST compensation cess, which are wholly appropriated by the states under a revenue guarantee mechanism. The guarantee was given to states under a separate law because the states were agitated over loss of significant fiscal autonomy as a result of the GST. Citing historical revenue trends, they asked for a higher share of GST proceeds but had to settle for a 50:50 formula. The five-year compensation period ended on June 30, 2022, but the compensation cess is still levied on a clutch of “de-merit items” for raising the funds needed to service the loans taken by the Centre to bridge the shortfall in the compensation kitty for the states.
A cess is an additional tax levied by the government to raise funds for a specific purpose. Major cesses include the health and education cess, additional excise duties on petrol and diesel, road and infrastructure cess, national calamity contingent duty, cesses on crude oil and exports.
Experts note that the lack of transparency over the usage of cess and surcharges raised by the Centre has been an issue of concern for long. The Budget documents also do not reveal the exact utilisation of these levies.
Notwithstanding these issues, these special levies are expected to remain a significant part of the Centre’s budget planning even going ahead, given trends in recent years.
“So long as the Centre has the authority to levy cesses, it may choose to levy a fresh cess. While some of the cess funds are shared with states for specific schemes and activities, the special excise duty on petroleum is solely used by the Centre and not given to states,” noted M Govinda Rao, councillor, Takshashila Institution, adding that the GST Compensation cess should not even be considered as part of the overall cess and surcharges as the money goes to the states.
Rao, who was a member of the 14th Finance Commission, noted that previous Finance Commissions have also adversely commented on this issue. While the number of cesses and surcharges has been rationalised by the Centre over the years, revenue raised through these cesses and surcharges has grown steadily over the last few years, and often at a faster pace than gross tax revenue.
According to India Ratings, the total cess and surcharge, excluding GST compensation cess is at Rs 3.88 trillion this fiscal from Rs 4.25 trillion last fiscal. However, with the robust growth in tax revenue, the mop-up from cess and surcharge is seen to be much higher this fiscal than was initially estimated. But the data shows that in most years, barring a few, these have recorded a double-digit growth.
“A major reason is the imposition of GST Compensation Cess, which is entirely used for payment of compensation to states and flows to states as grants-in-aid, in their receipts Budget,” the government said in Parliament recently, adding that resources from the other cesses are allocated to different schemes and programmes in the Union Budget, which are implemented by States and other implementing agencies.
State finance ministers had also raised the issue of high revenue collection from cesses at their recent pre-Budget with Union finance minister Nirmala Sitharaman.
“The ultimate aim of cesses and surcharges is to garner more revenue. These are not a part of the divisible pool of resources and can be used as per the discretion of the Centre. States believe that these are legitimate revenue, which the Centre should share with them directly,” said Sunil Sinha, Principal Economist, India Ratings.
NR Bhanumurthy, vice-chancellor, Dr BR Ambedkar School of Economics University, Bengaluru said these cesses and surcharges create a kind of imbalance between the Union and the states in terms of financial powers. “Successive Finance Commissions have said they should be brought under the divisible pool. All of us agree to that proposition. The GST compensation going away will lower the percentage of the cesses and surcharges in the gross tax revenue but the fact that the other cesses and surcharges will remain is a matter of concern,” he said.
A Constitutional amendment will be needed to bring cess and surcharges under the divisible pool of resources.
(With inputs from Prasanta Sahu in New Delhi)