Cess-and-desist: Cesses are unfair to states and, CAG says, mostly misused

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September 25, 2020 6:50 AM

The CAG report for FY14, for instance, spoke of how Rs 66,117 crore had been collected under the USO Fund—for providing telecom services in rural areas—but of this Rs 39,134 crore was never transferred.

A ‘social welfare surcharge’ of Rs 8,871 crore was levied on Customs, but no fund was created for this.A ‘social welfare surcharge’ of Rs 8,871 crore was levied on Customs, but no fund was created for this.

The increasing tendency of the central government to levy more and more cesses—instead of straight-forward taxes—is worrying since it is against the principle of federalism; while 41% of tax collections automatically devolve to the states, cesses are fully retained by the central government. While cesses were 14% of the Centre’s non-GST revenues in FY19, they are projected to rise to 18% in FY21. Put another way, had there been no cesses in the FY21 budget and these were replaced by taxes, the states would have got Rs 1,25,000 crore extra. At a time when, thanks to the economy slowing, states will get a smaller amount—the budget envisaged them getting Rs 7,84,101 crore by way of devolution—of central taxes and also lower GST revenues, the cess compounds their woes.

What is worse, as the CAG has just reiterated, this money is not even being used properly. By law, a cess is earmarked for something—like provision of primary education, for instance—but as the latest CAG report points out, while the Centre collected Rs 2.8 lakh crore from 35 cesses/levies in FY19, it only transferred Rs 1.6 lakh crore of this for the earmarked areas; the rest went into the Consolidated Fund of India and were used for meeting general government expenditure. A ‘social welfare surcharge’ of Rs 8,871 crore was levied on Customs, but no fund was created for this. During the year, CAG says, GST Compensation Cess of Rs 40,806 crore was short credited to the related fund; Rs 10,157 crore of the Road and Infrastructure Cess collected during the year was neither transferred to the related fund nor utilised for the purpose for which it was collected. Even more worrying, the report talks of Rs 1.2 lakh crore being collected as a cess on crude oil and natural gas for the Oil Industry Development Board, but all of this was retained in the Consolidated Fund of India.

What makes this all the more amazing is that this is not the first time the CAG is making these observations. The CAG report for FY14, for instance, spoke of how Rs 66,117 crore had been collected under the USO Fund—for providing telecom services in rural areas—but of this Rs 39,134 crore was never transferred. The latest report says “the issue of short transfer of the levy to the USO Fund had been brought out in successive reports of the CAG … but is yet to be corrected”. Given the obvious problem with imposing a cess instead of a tax and the fact that very large amounts of these cesses have not been used for their stated purpose, the government would do well to abolish them at the earliest.

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