The Centre expects to collect a staggering Rs 3.02 trillion from cess and surcharges in 2018-19 – 8.5 per cent more than the Rs 2.78 trillion it did in 2017-18 (Revised Estimates). This revenue will flow directly to the Centre and not be shared with states. To put this number in perspective – the Centre’s entire capital expenditure for FY19 is pegged at Rs 3 trillion.
The 14th Finance Commission had recommended that states’ share in the divisible tax pool be raised to 42 per cent from 32 per cent earlier. The divisible pool consists of all tax revenue collected by the central government, except those classified as surcharges and cess levied for specific purposes and collection charges.
Now, the Budget 2018 has pegged states’ share in the divisible tax pool at Rs 7.88 trillion in 2018-19, up from Rs 6.73 trillion the previous year. Working backwards, the divisible pool works out to around Rs 18.76 trillion in 2018-19, up from Rs 16.02 trillion a year earlier.
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After adjusting for the goods and service tax (GST) compensation cess of Rs 613 billion in 2017-18 and Rs 900 billion in 2018-19 to be transferred to states to make up for their losses on account of a shift to GST, the cess and surcharge collections accruing to the central government works out to around Rs 3.02 trillion in 2018-19, up 8.5 per cent from the previous year.
In 2017-18, the Centre will end up collecting Rs 2.78 trillion through this route, against a budgeted target of Rs 2.95 trillion, implying a shortfall of Rs 170 billion. This slippage is largely because certain cess and surcharges levied on top of indirect taxes have been subsumed under GST.
Take for example, the Swachh Bharat cess and the Krishi Kalyan cess added on top of the service tax. In 2017-18, the Centre had budgeted for a collection of Rs 133 billion and Rs 88 billion, respectively, through these two. But given a shift to GST in July, it ended up collecting only Rs 41 billion and Rs 27 billion, respectively.
This shift to GST also created another fiscal complication for the government: Revenue from cess and surcharges, which flows solely to the Centre, is typically earmarked for particular schemes. But now, as certain cess and surcharges are no longer levied, the Centre will have to provide for these schemes to some extent from its share of the divisible tax pool. This in turn will raise overall revenue requirements.
For example, if earlier Rs 100 was collected through cess to fund a programme, the Centre will now have to collect Rs 172.41 to meet the funding requirement of the scheme. Of this Rs 172.41, states’ share at 42 per cent works out to Rs 72.41. The balance, Rs 100 is available to the Centre to fund the programme.
In the Union Budget 2018-19, Finance Minister Arun Jaitley also increased the education cess on personal income tax and corporation tax. Data in the Budget reveal that from the education cess on direct taxes alone, the Centre hopes to mop up Rs 494 billion in 2018-19, up from Rs 260 billion the previous year.
From surcharges on direct taxes, it hopes to collect Rs 1 trillion in 2018-19, up from Rs 647 billion the previous year, while from the social welfare surcharge on customs, the Centre has pegged collections at Rs 80 billion in 2018-19.