Cess-surcharge route helps Centre fill its coffers

Denies states Rs 12,000 crore

With Finance Minister Arun Jaitley levying additional cess and surcharges in the Budget and renaming an existing tax as a cess, an additional Rs 30,000 crore is likely to be mopped by the Central government. But by choosing this route, it has denied Rs 12,000 crore of revenue to states, a share that would have gone to them if the Centre had not reduced taxes and increased cess and surcharges.

According to the Union Budget, states' share in total tax revenue in 2015-16 is budgeted at Rs 5.23 lakh-crore, 42 per cent of the divisible pool. The divisible pool consists of all tax revenue collected by the central government, except those classified as surcharges and cess levied for specific purpose and collection charges. The Centre has to share only the divisible pool of revenue collected with the states according in the proportion worked out by the Finance Commission. This year the states were to get 42 per cent of the divisible pool instead of 32 per cent mandated previously.

Working backwards, the divisible pool for 2015-16 adds up to Rs 12.47 lakh-crore. Subtracting this from total tax revenue gives the total cess and surcharges and collection charges to approximately Rs 2 lakh-crore. The same was confirmed by a government official, who did not wish to be named.

Using the same process, cess, surcharges and collection charges for 2013-14 and 2014-15 work out to Rs 1.44 lakh-crore and Rs 1.7 lakh-crore. So, with the share of the cess and surcharge going up over the years, the total divisible tax pool for states as a percentage of total tax revenues has actually gone down. According to the 14th Finance Commission as well, the share of cess and surcharges in gross tax revenue of the Central government has increased from 7.53 per cent in 2000-01 to 13.14 per cent in 2013-14. This means essentially only 87 per cent of the total tax revenue forms the basis of the devolution to the states.

In his Budget speech, the minister had said the conversion of existing excise duty on petrol and diesel of Rs 4 a litre into road cess would go to fund investment in roads and other infrastructure. By naming it a cess, the Centre will pocket the extra revenue collected. Further, with the clean energy cess increased from Rs 100 to Rs 200, the Budget expects to garner an additional Rs 6,000 crore. Jaitley has also abolished the wealth tax (which states got a share of) and replaced it with an additional surcharge of two per cent. This is expected to collect Rs 9,000 crore again end up with the Union government only.

As the share of cess and surcharge in gross tax revenues of the Central government has been steadily increasing, in their submissions to the 14th Finance Commission, states argued either the cesses and surcharges be eliminated or, if continued beyond a specified period, should form a part of the divisible pool.

Earlier finance commissions had recommended the central government reviews its position with respect to the current position and takes measures to reduce its share in the gross tax revenue.

Though the cesses are meant to be utilised for the purpose for which they have been levied, the finance commission notes that the Comptroller and Auditor General had pointed to the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses.